With prices starting to stabilize, household-name energy companies such as Exxon Mobil are returning to the head of the class. Why did investors forsake them in the first place?
The profits of supersized energy companies have shrunk in the past year, as lower demand and lower prices have pushed revenue growth down to levels not seen in the past four years. But with crude oil stabilizing around $75 to $80 a barrel and recession around the world fading, it looks like the biggest companies in the world are about to get their mojo back. And that ought to limit softness elsewhere in the market's benchmark indexes.
Oil's role in gross domestic product
The question here is not why they might come back from the dead but why investors ever disrespected them in the first place.
Think about it a minute: Exxon Mobil executives over the past century-plus, starting with John and William Rockefeller in the late 1800s, have created the world's most successful and profitable company, devoted to producing and selling the most important product in the world. The company employs more than 85,000 people, is one of the biggest drillers and transporters in the world, and virtually created the concept of a multinational company. More from MSN Money80 years later, this isn't '29 againGet ready to party like it's 1991Will Dow return to 14,000? Bet on itA tech stock to own nowWhy saving is for suckersYet shares are still negative in this amazing year by 6.5%. And its closest peers have been mostly ignored during the market's rally. Conoco is up just 1% this year, while Chevron is up 5%.
Can this really continue? Probably not, and investors are already voting with their money for a switch into these leaders. Indeed, as the first stage of the 2009 bull market matures, it looks like the "dash for trash" -- in which the worst companies' shares were purchased first and most avidly -- will end. And in their place are likely to surge companies that have billions in profits and valuations that are as low as they have been in a decade.The case for Big Oil I could give you a lot of fundamental reasons that Exxon deserves to move higher, of course. A declining dollar is good for oil prices. Higher emerging-market demand is good for oil prices. Exxon has the world's largest assortment of natural-gas interests, and the coming winter is expected to be colder than usual, which normally puts a lot of strain on natural-gas prices.
Moreover, a wet autumn in the Midwest has caused the wheat, corn and soybean crops to be waterlogged, and I'm told it must be dried out in a process that burns up a lot of natural gas. Plus, an improving U.S. economy will demand more gasoline than expected, which also helps the integrated energy giants, which get a lot of their income from wholesale gasoline, or what they call "downstream operations."
Video: $110 oil coming our way?
That's a lot of positives. Add in this: The shares are cheap. Exxon's trailing price-to-earnings multiple is a modest 11.7, quite a bit lower than the 13-to-15 multiple it was accorded from 2005 to 2008 or the 15-to-18 in 2003-04. And its earnings are in the process of turning around, so earnings growth over the near year should clock in at 10%.
That would make the multiple very tempting to investment managers who look for values. The turnaround potential is attractive to growth-at-a-reasonable-price managers. And if it can keep up its recent rise, it will catch the eye of managers who target stocks with price momentum. That's a triple whammy. A lot of ifs, to be sure, but were this idea a slam-dunk, it would not provide any potential for reward.
For this to work, the economy has to firm up. So let me just remind you, in case it's not obvious, that the worldwide upswing in industrial production is still on track. As noted by the analysts over at ISI Group, just one year after every national economy on Earth was declining at the same time, every economy is now improving -- though each is at its own pace.
Continued: Revving up the growth engine
1 | 2 | next >
Search for a Jon Markman article by topic or stock symbol.
Read Full Article »