I like Oil

[Hamlet]

A few things. McDonald's made about $5.5 billion per year in 2011,12, and 13, before earnings dropped to $4.8 billion in 2014, so using that one year to extrapolate their return on capital spending is assuming that 2014 is now the new normal rather than a down year (or two). That may end up being correct, but I wouldn't consider it a lock.

At any rate, I would think a poor return on new invested capital would be a reason to encourage dividends and buybacks, not discourage them. They are a mature business. There is little growth opportunity in their existing business and I would prefer that they not branch out into businesses beyond their competency. I'm happy to have the profits returned to me sensibly.

If you feel that MCD is overpriced at a PE 19.4 (I agree it is probably high), do you really think CMG is not at a PE of 55? For all the talk of CMG eating McDonald's lunch, they still have less in revenue than McDonald's has in earnings. There are dozens of companies that have been in CMG's position in the past, and McDonald's is still here. It's easy to grow a restaurant business fast from a small base, but many stumble pretty hard when they get to CMG's size.

I've owned MCD since 2002. At that time, they had issues that make this year's look like nothing real big. They had net income of 900 million or so down from 1.6 billion. Their menu was a mess (anyone else remember the salad shakers?), and they were in a foolish dollar menu war with Burger King. I bought the my shares at 21.5 in September of 2002 with the hope that they would right the ship. They did with a vengeance.

A down year of 4.8 billion doesn't look so bad when twelve years ago the down year was 900 million.

I suspect they will get their house back in order within a year or two.

I think perhaps I have not adequately done a good job describing the problem and the bubble I see building in corporate debt, and this applies equally to the oil stocks and to MCD.

Mc Donald's in 2008 made 4.2 Billion dollars, in 2014 4.8 Billion dollars. For the past 7 years net income has grown at 2.2 percent annually on average, this is based on actual dollars. On a per share basis thanks to share buy backs net income has grown 6 percent annually. The difference investors and McDonalds thanks to the continual pressure of share buybacks results in a higher PE than the company would deserve otherwise, currently at 19.4 which at 2 percent growth really belongs at a PE of no more than 14 in my view which would value the stock at 70 not 95. As McDonald's continues to participate in this poor use of corporate funds it is wasting the resources it has.

Over the last 7 years McDonalds has earned 34.8 billion dollars and paid 18.1 billion in dividends and 14.7 billion in share buybacks. Leaving McDonalds to fund it's net investment in the actual business with 2 billion dollars over those 7 years, to supplement that it has borrowed 7.1 billion in long term debt in this time and has had net cash investment (Capital Spending less depreciation) of 8 billion with another 1.5 billion or so used for other cash purposes such as inventory, receivables and changes in accruals. Total capital spending in this time frame was 18 billion dollars.

How effective is that investment of 8 billion dollars of cash - for that investment over the past 7 years of 8 billion income increased 500 million annually by the end of 2014. On total capital spending of 18 billion this is a return of 3 percent, McDonald's would do better buying Apple's long term debt with their short term 5 year debt. On the other hand the 320 million invested in Chipotle by Mcdonalds is now worth 22 billion or more than all the dividends paid by McDonalds in the last 7 years and built with capital McDonalds invested to create a national company that now openly mocks and is taking business from the very company that made it possible.

That a company cannot own soda shops, ice cream shops, railroads and banks I think is not true, with the proper management a company can invest in anything but a review of what they do with their investments should be the judgement of investors, not how much of the income they return to investors. And I firmly believe it is management's responsibility to return income to their investors but for a normal corporation I expect 33-40 percent. Over the last 7 years McDonalds has returned 94.5 percent of income to investors through dividends and share buybacks, I just think it is not a prudent use of valuable resources to be such as high percentage. The red flags on this stock are just so high to me and this is a similar problem the oil companies have.

Over the course of time described here as McDonald's has been on their share buy back spree the price has gone roughly from 50-55 dollars to 90-100 dollars, so looking at the share price one would think this has been a good thing for investors, but what this has been is a company overpaying for it's shares which are not worth more than 70 dollars in my estimation. I wonder how much better McDonald's would be if it had used the 14.7 billion in share buybacks to buy stock in Berkshire Hathaway instead and at least give their money to someone who understands investments better than Ronald!

 

[Running_Man]

A few things. McDonald's made about $5.5 billion per year in 2011,12, and 13, before earnings dropped to $4.8 billion in 2014, so using that one year to extrapolate their return on capital spending is assuming that 2014 is now the new normal rather than a down year (or two). That may end up being correct, but I wouldn't consider it a lock.

At any rate, I would think a poor return on new invested capital would be a reason to encourage dividends and buybacks, not discourage them. They are a mature business. There is little growth opportunity in their existing business and I would prefer that they not branch out into businesses beyond their competency. I'm happy to have the profits returned to me sensibly.

If you feel that MCD is overpriced at a PE 19.4 (I agree it is probably high), do you really think CMG is not at a PE of 55? For all the talk of CMG eating McDonald's lunch, they still have less in revenue than McDonald's has in earnings. There are dozens of companies that have been in CMG's position in the past, and McDonald's is still here. It's easy to grow a restaurant business fast from a small base, but many stumble pretty hard when they get to CMG's size.

I've owned MCD since 2002. At that time, they had issues that make this year's look like nothing real big. They had net income of 900 million or so down from 1.6 billion. Their menu was a mess (anyone else remember the salad shakers?), and they were in a foolish dollar menu war with Burger King. I bought the my shares at 21.5 in September of 2002 with the hope that they would right the ship. They did with a vengeance.

A down year of 4.8 billion doesn't look so bad when twelve years ago the down year was 900 million.

I suspect they will get their house back in order within a year or two.

As for CMG their increase in sales from 2008 from 1 billion to 4 billion in 2014 is only about 1 billion behind the increase MCD has had on a 23.7 billion in sales in 2008. And their net income gain over that time frame of 370 million dollars on is not that far behind McDonald's 500 million gain a the main reason CMG went from 50 to 650 over the time McDonald's went from 50 to 95.
Chipotle has done that return of 370 million dollars with a net capital investment of 607 million or a 60 percent return, which is why the PE is so high, although it is a very rich valuation. Chipotle has no debt, and with that extreme flexibility moving forward as consumer tastes evolve, an interesting fact back in 2008 when both stocks were at 50 is that both had book values in the mid teens, Chipotles book value has grown to 66 dollars per share while McDonald's has stayed flat.
Bad day after the market for CMG a very good day for oil and the oil stocks.

 

[Hamlet]

Hey, Chipotle has done a great job, no doubt, but you're still comparing growth rates off of bases that are an order of magnitude different. Lots of companies grow strong out of the gate. Will Chipolte still be doing great in 10 years? Or will it fall by the wayside like a large percentage or restaurant companies do?

How big do you think Chipotle is going to get? That PE of 55 is going to take a massive amount of fast growth to justify. Although a little less will be needed tomorrow when the stock opens.

I'm not sure comparing book values of a company that funds massive dividends and buybacks and one that still mostly building out new restaurants really makes much sense. Would you like MCD more if it had kept all that cash sitting around?

On the plus side, CMG just authorized expanding their stock buyback, so they will spend $200 million of that book value reducing their share count by 1%.

I think I'll stick with MCD. We'll see how things look in 2025.

As for CMG their increase in sales from 2008 from 1 billion to 4 billion in 2014 is only about 1 billion behind the increase MCD has had on a 23.7 billion in sales in 2008. And their net income gain over that time frame of 370 million dollars on is not that far behind McDonald's 500 million gain a the main reason CMG went from 50 to 650 over the time McDonald's went from 50 to 95.
Chipotle has done that return of 370 million dollars with a net capital investment of 607 million or a 60 percent return, which is why the PE is so high, although it is a very rich valuation. Chipotle has no debt, and with that extreme flexibility moving forward as consumer tastes evolve, an interesting fact back in 2008 when both stocks were at 50 is that both had book values in the mid teens, Chipotles book value has grown to 66 dollars per share while McDonald's has stayed flat.
Bad day after the market for CMG a very good day for oil and the oil stocks.

 

[NoiseBoy]

I have to ask: Why would you hate a company that buys its shares back-that's a good thing if you're a shareholder

The megacorp that I work for is a cyclical business. For the past two years they've been buying back stock, and some of that has been financed with new debt, I believe. Today, the stock is trading 30% off of its 52 week high and it's 15% below where it was 2 years ago. As a long term shareholder I don't see how I have benefited in any way from the billions that have been spent to, in my opinion, prop up the stock price. I did see executives filing SEC forms to sell shares when the price was over $100 a share. I'm not claiming insider trading or anything, just that they had incentives to unload, and did so at the right time. As a long term shareholder, I'd rather have dividends, more R&D spending, or even higher pay to the employees than borrowing to buy back shares.

 

[Empresario]

Buying on bad news can be profitable. Or, one can look foolish. Be careful!

Buying Exxon after the Valdez spill worked out pretty well for me. But, I did not believe in BP after the Gulf of Mexico spill.


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[MaddMaxx]

I have to ask: Why would you hate a company that buys its shares back-that's a good thing if you're a shareholder

Share buy backs are short term stock price increases that do not help with growth at all, and from a company perspective, it also makes it easier to be bought out hostile in a depressed market as their market cap is smaller.

 

[Fermion]

OMG I wish I had purchased more NADL. Bought 5000 at $1.28 and today it is $2.25.

Like winning the lotto.

 

[dallas27]

Share buy backs are short term stock price increases that do not help with growth at all, and from a company perspective, it also makes it easier to be bought out hostile in a depressed market as their market cap is smaller.

That doesn't sound right.

 

[papadad111]

What's not to like about an EPS increase? Maybe they flubbed the timing and could have bought it back cheaper later, but overall it tends to be a positive sign.

Markets are efficient yet some times irrational - typically a buyback instigated eps increase is not as rewarded as an actual business driven (top line or profit) eps increase. Buy backs are more often interpreted by the street as a signal of underlying intrinsic value. However corporations are smart and at times use buy backs to prop up shares.

 

[papadad111]

So back to oil .... How are you all doing in this trade ?

 

[aaronc879]

So back to oil .... How are you all doing in this trade ?

I bought SDLP at the perfect time. It's gone up almost 15% in the 20 days i've owned it. It'll be paying a 15% dividend soon as well. I wish I had bought more.

 

[dallas27]

So back to oil .... How are you all doing in this trade ?

I'm feeling like their is another fall in the future, that's when i'm buying. Else, i will miss the opportunity.


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[RISP]

So back to oil .... How are you all doing in this trade ?

Sold my tiny gambling position in Gazprom today. I made 20+% in just a few weeks, so I'm quite happy with myself. Might buy back in if it drops, say, 15% or so.

OMG I wish I had purchased more NADL. Bought 5000 at $1.28 and today it is $2.25.

Like winning the lotto.

Ugh, that stock doesn't look so great today. But still a very nice gain.

 

[ChiliPepr]

Share buy backs are short term stock price increases that do not help with growth at all, and from a company perspective, it also makes it easier to be bought out hostile in a depressed market as their market cap is smaller.

You are right, it does not help with growth, but should help the share price.

That doesn't sound right.

I do not believe that is correct ...

If the company has 2 million shares outstanding at $10/share the market cap is $20 million dollars.

If that company buys back 1 million shares, the share price should rise to $20, keeping the same market cap of $20 million.

Market cap, share price and shares outstanding have a basic formula...
All three of these are basically the same:
Market Cap = #Shares Outstanding * Share Price
Share Price = Market Cap / #Shares Outstanding
#Shares Outstanding = Market Cap / Share Price

If you change one of the variables, something else much also change....Reducing the number of shares outstanding (a buyback) should increase the stock price assuming nothing else has changed.

 

[Hamlet]

You're forgetting that the company is also reducing its cash to buy back its shares. The total market cap should go down by the amount of the buyback, assuming that the market is efficient and that the shares are fairly valued (big assumptions). It's the same company, just with that much less cash on hand.

Ultimately, whether a share buyback is a good idea depends on whether the shares are over or under valued.

I like share buybacks in general, because I feel that the management of most companies is not competent to expand their business by acquisition. If they can't expand their core business, for the most part I'd rather they just send me the money, since they are likely to waste it expanding into something new.

The drawback is that companies have an annoying tendency to buy high and sell low with their stock buyback plans.

I do not believe that is correct ...

If the company has 2 million shares outstanding at $10/share the market cap is $20 million dollars.

If that company buys back 1 million shares, the share price should rise to $20, keeping the same market cap of $20 million.

Market cap, share price and shares outstanding have a basic formula...
All three of these are basically the same:
Market Cap = #Shares Outstanding * Share Price
Share Price = Market Cap / #Shares Outstanding
#Shares Outstanding = Market Cap / Share Price

If you change one of the variables, something else much also change....Reducing the number of shares outstanding (a buyback) should increase the stock price assuming nothing else has changed.

 

[MichaelB]

for now, the offshore drillers are really in a pickle. Rig is under $20 and if oil stays low, say under $60, they and other offshore drillers have a big problem. I suspect rig will dump the dividend soon.

From the FT http://www.ft.com/intl/cms/s/0/ddf3b242-b601-11e4-a577-00144feab7de.html#axzz3Rvvk8htl

Transocean, one of the world’s largest offshore drilling contractors, is cutting its dividend by 80 per cent, in the latest sign of how the plunge in oil prices is hitting the industry.
./.
Transocean said on Sunday night that it had lost its chief executive. Steven Newman, who led the company for five years, stepped down on Monday in a move that was described as “mutually agreed” with the board.

​

 

[gcgang]

http://www.smh.com.au/business/worl...stake-in-global-oil-rout-20150218-13i71u.html

Warren Buffett just sold his XOM.


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[target2019]

Warren Buffett sells $4.7b Exxon stake in global oil rout

Warren Buffett just sold his XOM.

Yes, he did. I wonder at what point in 2014 4Q they threw in the towel.

Berkshire's 41.1 million shares of Exxon cost on average $US90.86 apiece in 2013, according to the latest annual report. A regulatory filing Tuesday showed Buffett sold the holding during the fourth quarter. The oil company traded for an average of $US93.27 in those three months, so Berkshire could have sold the stake at a profit. Scott Silvestri, a spokesman for Exxon, declined to comment.

I'm hoping this leads to more selloff, as I am waiting for $89/share.

 

[aja8888]

I'm thinking that crude oil will take another good sized dive later this year as inventories are very high. This may be why Buffet sold out.

I suspect there will be a couple of years before the oil game gets sorted out worldwide. Even then, it may be a wild ride from time to time. Commodities are a tough bet.

 

[Lakewood90712]

Yes, he did. I wonder at what point in 2014 4Q they threw in the towel.



I'm hoping this leads to more selloff, as I am waiting for $89/share.

OK XOM is there. I'm going to wait a while myself. Same for Chevron.

Might even go for transocean as a "put it in the freezer " buy. At $12 ? Transocean’s stock tumbles toward two-decade low - MarketWatch .

Feel sorry for the folks getting hit with layoffs.

Drilling will have to pick up sometime in a few years , and money will be made again.

 

[target2019]

OK XOM is there. I'm going to wait a while myself. Same for Chevron.

Might even go for transocean as a "put it in the freezer " buy. At $12 ? Transocean’s stock tumbles toward two-decade low - MarketWatch .

Feel sorry for the folks getting hit with layoffs.

Drilling will have to pick up sometime in a few years , and money will be made again.

I've decided to wait for $85 on XOM, meaning 3.25% dividend. I think there is more to shake out for XOM and CVX.

 

[Running_Man]

Crude prices seem like they are entering a price range that is unsustainable long term. Seems like a softball pitch to me.

USO/UCO is where I'll be in the next week or two, probably UCO.

Argument against Oil rebounding significantly in the next 3 years?

update on this thread as we approach the end of the 1st quarter, important because companies start to give companies outlook for the year and actual projects have to be cut. Crude Oil inventory is now approaching 100% of capacity as production, despite dropping rig count continues to be higher than consumption. Thought I would update what has happened in the 3 1/2 months since the start of this thread.

UCO which was down to 16.60 from 40 as a high bouncing point the last two years. Now UCO is at 6.96 even down 6% today from a 80 percent decline today from its 2014 high. A drop of 60% from the start of this thread.

XOM had a one year high at the start of this thread at about 105, and had fallen to 90 at the start of this thread as bigger oil seen able to handle this "temporary" price fall, down about 15%. From the start of this thread since then it has fallen another 8 percent to 83 despite an intermediate bounce to 95. Interestingly, 90.5 was the price Warren Buffet sold out of Exxon.

COP had a high of 85 and was at 66 at start of thread now at 61 with an intermediate bounce to 70.

CHV was high around 130 dropped to 108 at start of this thread had a bounce to 112 and now is at 101.

PEO the CEF I mentioned was at 24 down from high of 32 bounced to 25 and is now at 22.50.

NADL had a high of 11 in 2014 fell to 2.43 at the start of this thread, the drillers and not the multinationals being about the worst hurt, an 80% drop and since has continued to fall another 65 percent to 1.18, down 0.1 today which is a 10%. This stock is the living embodiment of the sage "never try to catch a falling knife".

 

[dallas27]

update on this thread as we approach the end of the 1st quarter, important because companies start to give companies outlook for the year and actual projects have to be cut. Crude Oil inventory is now approaching 100% of capacity as production, despite dropping rig count continues to be higher than consumption. Thought I would update what has happened in the 3 1/2 months since the start of this thread.

UCO which was down to 16.60 from 40 as a high bouncing point the last two years. Now UCO is at 6.96 even down 6% today from a 80 percent decline today from its 2014 high. A drop of 60% from the start of this thread.

XOM had a one year high at the start of this thread at about 105, and had fallen to 90 at the start of this thread as bigger oil seen able to handle this "temporary" price fall, down about 15%. From the start of this thread since then it has fallen another 8 percent to 83 despite an intermediate bounce to 95. Interestingly, 90.5 was the price Warren Buffet sold out of Exxon.

COP had a high of 85 and was at 66 at start of thread now at 61 with an intermediate bounce to 70.

CHV was high around 130 dropped to 108 at start of this thread had a bounce to 112 and now is at 101.

PEO the CEF I mentioned was at 24 down from high of 32 bounced to 25 and is now at 22.50.

NADL had a high of 11 in 2014 fell to 2.43 at the start of this thread, the drillers and not the multinationals being about the worst hurt, an 80% drop and since has continued to fall another 65 percent to 1.18, down 0.1 today which is a 10%. This stock is the living embodiment of the sage "never try to catch a falling knife".

thanks for that. I haven't bought in yet, I have been waiting for just a little more fear than we got. I've also been watching that capacity approaching 100. I think that will be the next pivot-able event. As soon as the headline reads "too much oil" because we can't store it anymore, I think that's the drop to buy into and when dominoes will start falling.

 

[petershk]

XOM and NOV are my favorites... Buffett notwithstanding.

Both companies have dividend payments alone that are bigger than my post tax mortgage interest rate .

That said I think you have to tolerate a year , 2, 5? of volatility and returns are likely "modest."

I don't think the oil economy is shifting in a major way for at least a few decades and I think the pain in oil is a showdown between mainly US frackers and OPEC. Eventually someone will flinch. Companies like Exxon and Varco win in that out one either way and have the balance sheet to survive pretty comfortably.

I think both companies have a 3-5%/year long term return on the downside and maybe 10%+ on the upside. Compared to long term interest rates and existing market returns that seems really good to me.

But of course you have to agree with the assumptions.

Garbage in garbage out

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[Brat]

I think the Saudi's are primarily playing Iran and Russia in this game. They hate Iran who is very dependent on oil revenues and Russia is Iran's friend who is also dependent on oil. ISIS is a threat to the Saudi kingdom too but I think their oil business is convenient collateral damage. Our production is a drop in the bucket in comparison.

I agree that Exxon will manage their way through this. A refiner like Valero would be another stock to consider.