Does InterOil Miss the Grade?

Margins matter. The more InterOil (NYSE: IOC  ) 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 we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong InterOil's competitive position could be.

Here's the current margin snapshot for InterOil over the trailing 12 months: Gross margin is 11.1%, while operating margin is 1.3% and net margin is -3.1%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where InterOil 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, 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 InterOil over the past few years.

Source: S&P Capital IQ. 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. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 13.1% and averaged 8.2%. Operating margin peaked at 5.0% and averaged -0.2%. Net margin peaked at 0.9% and averaged -3.9%.
  • TTM gross margin is 11.1%, 290 basis points better than the five-year average. TTM operating margin is 1.3%, 150 basis points better than the five-year average. TTM net margin is -3.1%, 80 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, but net margins still negative, InterOil still has some work to do.

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 (3) | 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 February 22, 2012, at 10:27 AM, kencooksam wrote:

    The writer has not done proper DD. Interoil is an exploration company with 3 investment bankers working for 5 months with deals leaked in the WSJ.

    Why is this key information not stated in a margin story which does not apply to Interoil????

  • Report this Comment On February 22, 2012, at 10:42 AM, 2timfoolery wrote:

    kencooksam's comment above is dead on. The current refinery business is NOT the story. The IOC story is in its E&P biz-- world record gas wells, over 4mm acres of leases, and likely natgas reserves in the trillions of cubic feet. The current stock price values the NG in the ground at about $.40/MCF, a small fraction of other deals in Asia. Post-deals the stock should be over $100, and much higher again as it nears production. Big miss in writing.

  • Report this Comment On March 02, 2012, at 7:24 AM, rodessa wrote:

    Billionaire investor George Soros recently sold 2.56 million shares of InterOil, reducing his share of the company (which stood at around 12% a little over a year ago) to just over 3%, certainly because he has some information the rest of us don't.

    About ten years ago, INTER OIL acquired rights in Papua New Guinea for lands that several other companies had explored and abandoned.

    In the New York Times, Whitney Tilson notes that InterOil "...has no reserves--not proven, not probable, not even possible." Some important things to remember about the company: it lost 40% more money ($19.8 million) in the third quarter of 2011 (MRQ) than it did in the same period in 2010 on lower margins and the company still has not found an operating partner for its Gulf LNG projects in Papua New Guinea despite numerous press releases promising that a partnership is in the works.

    According to me, time has come to sale if you hold and to short some more stocks.

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