Here's 1 Reason McMoRan Exploration Looks Weak

Margins matter. The more McMoRan Exploration (NYSE: MMR  ) 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 McMoRan Exploration's competitive position could be.

Here's the current margin snapshot for McMoRan Exploration over the trailing 12 months: Gross margin is 62.8%, while operating margin is -16.3% and net margin is -2.9%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where McMoRan Exploration 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 McMoRan Exploration 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 78.1% and averaged 66.8%. Operating margin peaked at 18.4% and averaged -12.6%. Net margin peaked at -2.9% and averaged -22.3%.
  • TTM gross margin is 62.8%, 400 basis points worse than the five-year average. TTM operating margin is -16.3%, 370 basis points worse than the five-year average. TTM net margin is -2.9%, 1,940 basis points better than the five-year average.

With recent TTM operating margins below historical averages, McMoRan Exploration has some work to do.

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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.

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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 10:42 AM, RDHouston wrote:

    While your margin analysis is correct take a look at the ultra deep well potential. The potential down the road is excellent. just ask Chevron

  • Report this Comment On February 22, 2012, at 1:54 PM, nickbsteelers96 wrote:

    IF MMR finds what they are excpeting.....Major company Cheveron has asked them for help on there wells.

  • Report this Comment On February 22, 2012, at 2:25 PM, duckduffer wrote:

    Unfortunately for this author's future credibility, the future potential in margins is what will drive this stocks price, not the trailing margins. To look forensically at an E&P without regard to what lies ahead is not a very helpful nor profitable analysis. MMR has potentially uncovered natural gas reserves in the shallow water ultra deep play that will value this company much higher should those reserves be proved. A flow test is nearing that begins the process of unlocking that value. Stay tuned.

  • Report this Comment On February 28, 2012, at 10:32 PM, Zoomcharts1 wrote:

    Private sector investments may not make sense to the average skeptic, but when you have a group of very intelligent men with the money to pursue great things, profits will come. My bet is on MMR. Who is John Gault?

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