From: "Gary Britt" 


"John Cuccia"  wrote in message
news:nnh0q15l9sjpjf78e0kopl3kvh68pij5sv{at}4ax.com...
> On Wed, 14 Dec 2005 11:16:02 -0500, "Gary Britt"
>  wrote:
>
> >I don't know, and I'm not sure how the ROCE figures are calculated (what
and
> >how they have included/excluded items) or what precisely ROCE is an
acronym.
>
> If you don't know what it is or means, how can you say "The fact
> remains that oil company profits are not excessive as a percentage of
> sales or as a return on the capital invested in machinery and
> equipment, inventories, etc."?

Answered in the same message, you quote the answer below.  Are capital
expenditures in the ROCE current year's capital expenditures or the total
amount of accumulated dollars invested in capital equipment ?  I've been
talking about the latter.  How is accumulated depreciation and amortization
handled in either set of numbers?  How should it be handled, included,
excluded, subject to FMV limitations on high end, low end, both ends?

The reported net profits of the oil industry I've seen commonly reported is
7% to 10% for the quarter bumped by Katrina oil price increases.  The same
reporters indicate most corporations net profit is around 10% to 11%, so
Oil companies generally run lower than most.

>
> >That's why I have been saying the simplest way for us non-oil industry
> >expert analysts to know what the expert analysts think of the oil
companies
> >earnings and profitability levels, is to look at the oil companies share
> >prices and price earnings ratios.
>
> Share prices?  Here you go.  Looks like the experts think quite highly
> of the oil industries earning and profitability potential.

You can't use JUST share prices you have to use PRICE EARNINGS RATIO.
Price/earnings ratio is the number of times earnings per share = the share
price.  If you look you'll find the current INCREASED share prices you are
talking about in your message only reflect a price of around 11 times
earnings.  Most corporations trade at multiple of earnings greater than 11
times.  Some companies trade or have traded at more than 100 times
earnings. Average currently is greater than 11 times.  I got the 11 times
from a stock chart George linked to in one of his messages where he was
posting how the stock's nominal value had changed.  Right on that same
chart showed the stock price was 11 times earnings.  (11.05 to be precise),
and I am making the rather safe assumption that all oil companies stocks
are trading at around the same number of times earnings.

You can verify all this by just going to yahoo finance or your online
brokerage account and looking up the earnings per share for any group of 10
or 20 of the top 50, top 100, or top 200 corporations.  Look at what their
shares are trading for as a multiple of earnings (i.e. the price/earnings
ratio).  Then look up Exxon-Mobile, Texaco, and a few other oil companies
and see what their current share prices are trading for as a multiple of
earnings.

Ask any stock broker if it would be true, other factors being equal, if a
company is extraordinarily profitable because of extraordinarily high
profit margins if that would be expected to cause that extraordinarily
profitable company's stock price to be bid up by increased investor demand
and as a result the company's share price as a multiple of earnings
(price/earnings ratio) will be higher.  You'll get a yes answer.  Companies
with extraordinary profit expectations get extraordinary share prices and
that share price will be a much higher multiple of earnings than for
non-extraordinarily profitable companies.  Look up googles' share price and
the price/earnings ratio for that price.  You'll find its a heck of lot
more than 11 times earnings.

>
> Exxon stock jumped from $40 to $60/share in  the past 2 years, as did
> Chevron-Texaco's.

And that proves what?  NOTHING.  What was the price earnings ratio two
years ago, and what is it today?  What was the price earnings ratio of most
of the Dow 30 corporations two years ago and what is it today?  Then
compare them. Two years ago the oil companies were probably just marginally
profitable and when their profits go from marginal to a little less than
normal low and behold their stock prices jump up a bit.  Gee that's a
surprise.

The whole point of all of this was a false claim that oil company profits
are out of line or extraordinarily high.  That is false.  If it were true
then the oil company stock prices would trade at a premium to reflect their
extra profitability compared to other corporations.  That premium would
result in a stock price that is a higher multiple of earnings than most
companies.  The fact that oil company stocks, currently at pretty high
prices in absolute historical terms, are still just 11 times earnings, and
lower than most corporations price/earnings ratios, is confirmation that
industry analysts don't see extraordinary profitability, and therefore
these analysts aren't directing institutional investors to buy oil company
stocks in sufficient numbers to drive up the price (and therefore drive up
the price earnings ratios) higher than a measely 11 times.

Its simple.

Gary

(Also, one final problem with comparing changes in the nominal price of the
stock from two years ago to today, is that most stocks have increased in
value around 30% over the past two years merely as a result of increasing
profitability of all companies as the economy in general improved).
Obviously those nominal increases in price have NOTHING to do with the
corporations in this country suddenly becoming extraordinarily profitable.

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