Why ExxonMobil should be in your energy portfolio (Part 6 of 8)

(Continued from Part 5)

ExxonMobil’s operating earnings

In the last part of this series, we analyzed ExxonMobil’s (XOM) revenues. Revenues are the broadest measure of a company’s performance.

Now, let’s dive deeper into ExxonMobil’s performance. We’ll analyzing its operating earnings.

Gross profit

A company’s gross profits are the broadest measure of profitability. We can see a trend. It’s similar to the trend we saw in ExxonMobil’s revenues. They’re quite volatile.

This means we need to look at the finer measure of its profitability—its gross margin. The gross margin is the company’s gross profits scaled in terms of its revenues.

ExxonMobil’s gross margins show a declining trend. This is a concern. It means that its costs of doing business have been going up—something we discussed earlier in this series.

Operating income

When other expenses of doing business—like executive salaries or selling, general, and administrative expenses, or SG&A—are removed from gross profits, we get a company’s operating income.

Looking at the above table, it appears that ExxonMobil has been able to manage its operating expenses quite well. Its operating margin saw a steady decline over the years. This is a “flow through” effect of a declining gross margin. The metric was a little steadier—compared to gross margins.

For context, ExxonMobil reported an operating margin of ~10% in 3Q14. Chevron (CVX) reported a margin of ~12%. ExxonMobil’s international peers—Royal Dutch Shell Plc (RDS.A) and BP (BP)—reported operating margins of ~6% and ~3.2%, respectively, for the same period.

ExxonMobil and Chevron are American integrated energy companies. They have outstanding operating margins. The companies can be accessed in a low-cost and diversified fashion through the iShares U.S. Energy ETF (IYE). The two companies account for more than 35% of the ETF’s holdings.

EBITDA

EBITDA (earnings before interest, tax, depreciation, and amortization) is a broad measure of a company’s profitability. It’s commonly used by the markets. It adds non-cash depreciation and amortization charges back to the operating income.

It’s widely used to determine companies’ valuation.

ExxonMobil’s EBITDA margin is the EBITDA scaled by revenues. Its EBITDA margin is resilient—like the operating margin.

In the next part of this series, we’ll determine if ExxonMobil’s resilience extends to its net earnings.

Continue to Part 7

Browse this series on Market Realist:

• Part 1 - Analyzing ExxonMobil—the world’s largest listed energy company

• Part 2 - ExxonMobil is one of the best energy stocks for investors

• Part 3 - Understanding ExxonMobil’s upstream reserves and production