Who's Making Windfall Profits?

In covering energy for the Fool, I've received several reader comments regarding Big Oil's seemingly excessive profitability. Some cry conspiracy, while others merely feel that the oil companies gouge Joe Six-Pack at the pump.

Politicians get a lot of play by standing up for Joe. The Windfall Profits Tax was on the books for the better part of the '80s, and Congress has often attempted to revive it. While the House, regardless of its motives, was economically laudable in reducing subsidies to the oil industry in January, an excise tax on Big Oil's excessive profits has no such leg to stand on.

Perhaps you disagree with me that a windfall profit tax would reduce output and consequently raise prices for consumers. Fine. We'll charge ahead with our taxation scheme. If I were to give you an anonymous list of some leading American companies, you could spot the price-gouger, right?

Let's proceed with a game I'd like to call ... Pick the Profiteer! Your choice will indicate the industry that's clearly making more than its fair share. We'll tax those excess profits to subsidize the unreasonable prices that consumers pay for the industry's products. Sound good? Here are your choices:

Gross Margin

Net Margin

Return on Assets

Return on Capital

Company A

31.7%

12.9%

14.1%

21.9%

Company B

49.2%

18.6%

14.9%

23.4%

Company C

65.6%

21%

14%

19.3%

Company D

32.8%

9.5%

14.4%

23.9%

Company E

28.9%

6.5%

16.5%

64.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance, with the exception of the final column. Free cash flow amounts are unlevered.

... Take all the time you need.

Ready to tax that windfall? That was pretty easy, right? Clearly the oil company is C, the one making the most money off of every dollar of sales. Nope! Actually, that's Coca-Cola (NYSE: KO  ) . And B, the company with the second-highest margins, is 3M (NYSE: MMM  ) .

Hmm. Fine, then it must be E, right? It is, after all, the company earning the most relative to the amount invested in the business. Sounds like excessive profitability to me! Well, that would be Accenture (NYSE: ACN  ) .

Let me stop you -- it's not A, either, which I should note also happens to sport the highest free cash flow growth among the five. That would be Apple (NYSE: AAPL  ) .

Whichever "parasitic" company you chose, I hope you're ready to fire off a missive to your senator, demanding an excise tax on those rip-off Cherry Cokes, Post-it Notes, consulting contracts, or iPods.

While the sheer size of a company like Chevron (NYSE: CVX  ) , company D, translates to some eye-popping profit numbers in absolute terms, I would hope this exercise gave you a little more perspective on Big Oil's profitability relative to its large-cap brethren.

Here at the Fool, we love big, profitable companies. That's why Coca-Cola, 3M, and Accenture have all been recommended to Motley Fool Inside Value subscribers. Interested readers who would like to boost their returns via profiteering companies such as these can now sign up for an all-access 30-day free trial.

Fool contributor Toby Shute doesn't presently buy gasoline. Perhaps he'll embrace the conspiracy theory once he starts driving again. He doesn't own shares in any company mentioned. The Motley Fool's disclosure policy doesn't gouge anybody.


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