Oil giant Total feels the squeeze
Why are my shares of Total SA down when oil prices are high?
Although the giant oil company has benefited from the rise in oil prices, all energy companies must contend with rapidly rising costs of equipment, manpower, refining and marketing.
That makes capital spending to expand oil and gas supplies around the world more expensive and squeezes profit margins. That expansion competes with shareholder expectations that companies will use their cash to increase share buybacks and dividends, which Total has done.
Another concern for the industry is that a recession could reduce worldwide demand for crude, sending oil prices lower.
Shares of Paris-based Total are down 12 percent this year after gains of 15 percent last year and 14 percent in 2006. An indication of its popularity with U.S. investors is the fact that 20 percent of its daily trading activity is done through American depositary receipts.
Total merged with the Belgian firm Petrofina SA in 1999 and French firm Elf Aquitaine in 2000 to attain a scale and global diversity likely to provide profits for years to come.
The consensus analyst recommendation on shares of Total is "buy," according to Thomson Financial.
Indicative of its vast exploration and production, Total recently signed a deal to build a petrochemical complex in Algeria, entered into an oil project in Venezuela and joined a consortium to develop an oil field in Kazakhstan. It also discovered oil off the shore of the Republic of Congo.
Total is involved in joint bids with other French firms to build nuclear power reactors throughout the Middle East and North Africa.
French global politics had made it possible for Total to tap resources in places such as Iran, Syria and Sudan, where U.S. and British firms didn’t enter. But some competitors are now beginning to gain access to previously off-limits energy regions.
Total’s earnings are expected to rise 7 percent in 2008, with a five-year annualized growth rate projected at 6 percent.
What are your thoughts on Davis New York Venture Fund, which hasn’t done well for me?
With more than one-third of its $48.5 billion portfolio invested in financial stocks, its longtime competency area, this fund has had rocky times lately.
Yet stress from the credit crunch and subprime mortgage debacle doesn’t erase the fact that it has two outstanding portfolio managers in Christopher Davis and Kenneth Feinberg. They seek quality companies trading at discounts to what they consider underlying value.
These managers feel your pain: Each has more than $1 million of his own money invested in the fund.
The Davis New York Venture Fund is down 1 percent over the last 12 months to rank in the top 40 percent of large growth and value funds. Its three-year annualized rise of 9 percent places it just outside the top one-fifth of its peers.
"It remains one of our top picks in its category because its managers are principled, hard-working and intelligent, with an experienced team of analysts to bolster their efforts," said Dan Culloton, an analyst with Morningstar Inc fast payday loans. "Looking longer term, the fund’s 10-year annualized return beats about 86 percent of its peers and beats the S&P 500 by more than 2 percentage points."
The Davis funds have excellent shareholder communications that underscore a firm commitment to buy-and-hold investing. Davis and Feinberg follow a careful strategy of assessing a company’s true cash earnings, comparing them with the return on adjusted invested capital and determining how well the company allocated capital in the past.
Portfolio holdings Citigroup Inc., British bank HSBC Holdings PLC and H&R Block Inc. took hits in the credit crisis, yet other financial holdings such as Berkshire Hathaway Inc. and Bank of New York Mellon Corp. held up well.
Besides financials, notable concentrations in the fund are energy, consumer goods and consumer services. Top holdings include American Express Co., ConocoPhillips, American International Group Inc., Altria Group Inc., Costco Wholesale Corp., JPMorgan Chase & Co., HSBC, Berkshire Hathaway and Wells Fargo & Co.
This 4.75 percent load (sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 0.84 percent.
How do you determine if a price-earnings ratio of a stock is too high?
The price-earnings ratio, or P-E, is a company’s price per share divided by its earnings per share. For example, a $60 share with earnings of $3 a share has a P-E of 20.
Often stated is the "trailing" P-E, the stock price divided by earnings per share for the previous 12 months. But the "forward" P-E for the coming year is also used.
"An investor should compare the P-E of a stock to its specific peer group," said James Paulsen, chief investment adviser for Wells Capital Management in Minneapolis. "For example, you should compare a technology stock to other tech stocks."
Examine the company’s growth rate and financial condition, he said. A small, rapidly growing company might have a higher P-E than the overall market but still be considered cheap.
"Historically, there has been an average P-E range for the total stock market of 6 on the low end and the low 20s on the high end, with the average about 14," Paulsen said. "P-Es were low from the mid-1970s to the mid-1980s because of high inflation and high interest rates, an indication that the investor must examine the overall environment."
andrewinv@aol.com
2008, TRIBUNE MEDIA SERVICES INC.
Filed under: finance by Fred