Here's How Frontier Oil May Be Failing You

Margins matter. The more Frontier Oil (NYSE: FTO  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Frontier Oil's competitive position could be.

Here's the current margin snapshot for Frontier Oil and some of its sector and industry peers and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Frontier Oil




 Sunoco (NYSE: SUN  )




 Valero Energy (NYSE: VLO  )




 Tesoro (NYSE: TSO  )




Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Frontier Oil has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Frontier Oil over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 13.9% and averaged 8%. Operating margin peaked at 12% and averaged 5.5%. Net margin peaked at 7.9% and averaged 3.6%.
  • TTM gross margin is 4%, 400 basis points worse than the five-year average. TTM operating margin is 1.3%, 420 basis points worse than the five-year average. TTM net margin is 0.6%, 300 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, Frontier Oil has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Frontier Oil? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2011, at 11:34 AM, paddlinfaster wrote:

    Here's how FTO has "failed" me :

    I bought the stock in Dec 2009 for $11.25. Counting the 2 dividends & the recent Special Dividend - my cost basis is now $10.85. FTO is now over $29, so I'm up over 170%.

    I wish ALL my stocks FAILED me like this!

    Too bad the every-month Best Buy Now GG recommendations CGA & YONG couldn't have FAILED me like THIS & not the way they truly are.

    What I WOULD like to hear about is the merger with HOC & whether we should or hold the FTO shares before the conversion. That you have not even mentioned that pending development makes this "article" worthless.

  • Report this Comment On April 02, 2011, at 11:19 AM, hermnerm wrote:

    Isn't HOC's margin a little more important than anything else in FTO's future?

  • Report this Comment On April 04, 2011, at 2:11 PM, eaamon wrote:

    hoc and fto are tied to the hip. the merger that is along with stock price.

    fto is a completely rebuilt brand new. it can process the heavy sours too.

    I bough some / a lot of this in the months prior to Katrina and now costs basis after the very last dividend is down to about $7/ share counting the splits. not to mention I did get some when it hit $8.75.

    so it may not look as good in the last few years but it does cost to rebuild so numbers may not be the best.

    it was a patsy during some of those years as option players had a feast.......

    the thing going forward the merger with HOC will only make a better bigger company not having large up and down swings due to large option traders who can swing a price.

    some day any dividends will be on a $0 cost basis.

    not to mention where the price will be.

  • Report this Comment On April 04, 2011, at 2:15 PM, eaamon wrote:

    PS. when you look at the chart note the good years after Katrina.

    then as you look it is down.

    being re-built you do not produce product and money right?

    gota pay bills for the rebuild.....

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