Tuesday, August 09, 2005

ExxonMobil versus Philip Morris - a tale of two stocks

At the site Dog n Pony Show, I enegaged in a debate with a person by name of Postraider on the 'excessive' profits of Oil companies. For the sake of berevity, our friend Postraider had issues on the profit margins of the oil companies and that they were excessive. I pointed out that they were not excessive considering the long-term performance of the stock vis-a-vis other stocks of comparable size in different sectors.
If integrated oil companies like Shell, BP, Chevron, or ExxonMobil truly had higher profits over the long run than other companies, then assuming that the equity markets are more or less efficient:
  1. The profit margins for Exxon (XON/NYSE) should be significantly higher than other S&P 500 stocks.
  2. The P/E ratio should be significantly higher on the stock, reflecting the above average profit potential of the company.
  3. The share performance, over the long run, be superior to all other stocks on the S&P 500.

Let's see how they line up. For comparison, let's use Johnson & Johnson (JNJ/NYSE), WalMart (WMT/NYSE), Microsoft (MSFT/NASDAQ), and Philip Morris (MO/NYSE) as a sample of comparable sized companies in different sectors.

First, let's take a look at the long term charts for these stocks (see above). XOM is not even the top performer over the long-term vis other sectors of the economy. Second, the profit margin for XOM as of today is 9.94%. WMT is 3.63%, JNJ is 18.36%, MO is 14.55%, and GE is 11.29%. These numbers suggest, along with the chart above, the XOM's profitability is within the expectations of the largest S&P 500 companies.

In summary, the profitability of integrated oil companies are in line with the market as a whole, and is reflected in the relative performance of oil companies versus other sectors.

When I have the time, I'll make a more detailed analysis of the sector and the claim of 'obscene' profits.

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