For a book project we are working on, we conducted a common size analysis of Exxon Mobil’s (NYSE:XOM) and Total SA’s (NYSE:TOT) financial statements. We figured it would be something worth passing along here.
In addition to comparing a single company’s performance over time, common size analysis can be a useful way to compare the performance of two or more companies with each other. However, this is not as easy as it may seem. For one thing, not all companies use the same reporting categories. Even if similar expense categories are used, one company may classify certain costs in a different category. For example, some companies include some or all of their depreciation expense within cost of sales, while others separate it out as a line item.
Exhibit 1 presents a side-by-side comparison of Total SA and and Exxon Mobil vertical common-size income statement data for 2006. Notice that Total reports higher “other operating expenses” than Exxon’s “production and manufacturing expenses” when measured as a percentage of sales. However, Total shows no category for “selling, general and administrative expense,” which it appears to include within that “other operating expenses” line along with production and manufacturing expense. To compare the performance, the investor must add Exxon’s production expenses (8.1%) to SG&A expenses (3.9%) to arrive at a category similar to Total’s “other operating expense.” On this basis, Exxon Mobil spent 12.0% on the category while Total spent 12.7%.
Other issues include differences in accounting methods. We discussed the fact that beginning in 2006, Exxon Mobil must record the full estimated amount of its pension shortfall, whereas before it was only required to recognize a portion of it. Under International Accounting Standards, Total still reports just a portion of the expense, so the two are no longer comparable on that basis.
Companies can also employ different business models. We earlier compared the fixed cost structure of Landstar [(NASDAQ:LSTR) - Annual Report] and Arkansas Best (ABFS). Because of their different business models, the cost structures may also differ. Landstar pays its drivers a percentage of the revenue from each load, whereas Arkansas Best pays drivers per mile driven. Arkansas Best may be able to reduce driver pay, while for Landstar the pay varies with revenue and is therefore something they would want to maximize in absolute dollar terms.
For these reasons, investors should have a solid understanding of any differences in accounting methods between companies being compared. Additionally, it is usually preferable to compare more broad based common-size data rather than line-by-line comparisons. Generally speaking, operating margin, pre-tax margin and net profit margin are more comparable between firms than, for example, gross margin or SG&A expenses.
In the case of Total SA and Exxon Mobil, Exxon appears to have higher operating margins – primarily due to lower purchases of crude inventory as a percentage of sales. Given its larger size, it is probably able to produce more of its own requirements. Other operating items appear relatively evenly matched, once some categorization adjustments are made.
Exxon also has lower sales-based taxes and more “other income.” While the taxes are a fair issue, it is probably not fair to judge management performance on the basis of non-operational items. However, regardless of the sources, Exxon Mobil clearly appears to return a higher percentage of sales to its shareholders.
We can also compare both companies to industry data. For example, Yahoo! Finance reports key industry financial ratios, with the data provided by Hemscott Americas. Here is a selection of the industry data they provided for the Major Integrated Oil & Gas Industry recently.
The net profit margin given for Exxon Mobil and Total SA are similar to those we calculated, despite being made on the basis of the most recent quarter rather than the full year 2006. We can easily see that Exxon’s net margin was higher than the 10.3% industry average, while Total’s was lower.
We can also compare the debt to equity ratios of the firms and industry using this data. We find that Total SA has more debt than average, while Exxon has less. Finally, we can compare return on equity (see Chapter 6), which combines net income (an income statement item) with total equity (a balance sheet item.) Although both companies have higher returns on equity than the industry average, Exxon’s is the better of the two.
Overall, it appears that Exxon Mobil is using its resources more effectively than Total.
Disclosure: Author has a short position in Landstar System put options at the time of publication.
XOM vs TOT 1-yr chart: