Monday, April 27, 2009

Moral Dilemma

Most of the time, people think of investing in a business purely as a way to make money from capital gains if you are lucky enough for the trade to go your way. Some industries tend to be more profitable than others, and the net profit margin ratio tends to give a fair measure of the profitability of the business. So when I am on the hunt on the market, I usually screen my search to include only companies that have a net profit margin of at least 8% (the higher the better). Those companies have a smaller tendency to see their net earnings eroded by price fluctuations in their products or services.

One of the seldom industries to have consistently shown incredible earning power for over a century are the ones involved in the petroleum industry, ranging from integrated oil companies to oil exploration companies. That industry is relatively safe because so much of our modern economy relies on oil and gas as a relatively cheap and reliable source of energy.

The company that impresses me the most is ExxonMobil (NYSE: XOM) and I remain surprised to this day that very few people are aware of its gigantic size. The company is in fact the biggest chunk of the now dismantled Standard Oil empire founded by the late John D. Rockefeller. With revenues of 477 billion dollars and 45 billion dollars in net profits in the year 2008, which would give it a net profit margin of about 9.5%, this company is a champion at creating value for its shareholders. And with return on equity of 39% in a year that critical and a direct witness to the spectacular drop in the price of crude oil, I am dazzled at the way a company with assets of about 200 billion dollars still manages to show figures that impressive. That financial snapshot is consistent with other integrated oil companies, whatever their size.

The loophole for a socially aware investor is when you know that as interesting as that figures of that company are, its activity is, directly and indirectly, very damaging to the environment. So one may wonder if it is possible to make reasonably good acquisitions as an investor and at the same time be in line with our moral values. I am not quite sure of that answer yet but I sure hope it is something possible.

Full disclosure: the author has no position in XOM.

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