In this episode of MarketFoolery, host Chris Hill talks with analyst Taylor Muckerman about a few of the market's biggest stories. First, gargantuan Dow darling Caterpillar (NYSE:CAT) reported a fantastic second quarter. Caterpillar investors in the past 12 months have been well-rewarded by a 25% climb that'd be a treat even for a company that wasn't worth $83 billion in market cap. What is this machine maker getting so right?
Then, the two look at the disparity of results between big oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) -- which did better this quarter, which has the better long-term outlook, and what investors should know before buying in. Click play to find out more.
A full transcript follows the video.
This video was recorded on July 30, 2018.
Chris Hill: It's Monday, July 30th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, North Carolina's own, Taylor Muckerman. Thanks for being here!
Taylor Muckerman: I appreciate it!
Hill: I was just down in your state.
Muckerman: How did it treat you?
Hill: Asheville treated me very, very well.
Muckerman: It's a popular city, and for good reason.
Hill: It's a great city. We have Big Oil. We're going to talk Big Oil, and we're going to talk big machines. Let's start with machines, and that's Caterpillar. Caterpillar's second quarter ... they kind of did everything, right?
Muckerman: They did.
Hill: Profits higher than expected, revenue higher than expected, they raised guidance for the full fiscal year. Caterpillar helping to push the Dow up a little bit today.
Muckerman: Not something you typically see from a company this size, boosting guidance by 7% and revenue across the board up. If you look at their divisions, Construction revenue, the biggest segment that they have as a business, up 24% to almost $6.2 billion. The Resource segment, up 38%. Energy and Transportation, up 20%. Those are some big numbers from a big company.
The stock was moving a little bit more earlier this morning. It seems to have come back down to earth. Still impressive, especially when you consider the last six or seven months. This stock got caught up in all the tariff talks and trade war talks, and reasonably so. These machines do cost a lot of money. Steel is a big factor in these machines, and China's demand is also a big factor in Caterpillar's performance. So, the trade war talks hit the stock a little bit. It still had such a great two-year run that investors who have been holding it have been well-rewarded. Judging by the company's talk today, they probably have a little bit more room to run.
Hill: Even when you figure, this thing was higher earlier this year, it's still up 25% over the last 12 months. For a company of Caterpillar's size, you don't really buy a company like Caterpillar expecting that kind of growth. We've talked before about the struggles that Caterpillar had for a good stretch of time. When you hear the comments from management -- and, you're right, raising guidance that much, with so much to go in the fiscal year, is a little bit of a surprise. But, when they back it up, when they're talking about, "Our order rates are good, our backlog is solid." They're not selling coffee. It's not a consumer-facing business. They're making huge machines, and the orders are coming months, if not years, ahead.
Muckerman: Yeah, you have some good leading indicators with a company like this, because it does take a while, surprisingly, to build a dump truck the size of a house. The energy sector has rebounded, that's helping. Construction across the globe seems to be doing well. U.S. GDP had some great numbers. Definitely still a market out there for these machines.
They're keeping up with technology. Some of these big dump trucks they have running around mines and oil fields are almost fully autonomous. They are keeping up with technology there. They're the market leader when it comes to this kind of stuff. Very big barriers to entry, as you can imagine, for the technology and the scale that they have. The finance division, doing alright there, as well. Globally, and every segment, performing very highly for this company.
As you mentioned, 25% in the last 12 months. Two years ago, the stock was about $80 a share. We're looking at it north of $140 right now. Impressive movement for a company this big.
Hill: On a valuation basis, do you look at this and think it's still cheap, or is it less cheap but still cheap enough?
Muckerman: I think, if I was looking at this stock at the beginning of the year -- I did, and I stayed away. But, the last six months, it's pulled back to a point where it's certainly worth considering, if you still believe that global growth has a couple of years left to continue this demand cycle that you've seen with Caterpillar.
Hill: Last week was so busy, in terms of earnings stories, that, on Motley Fool Money, we didn't have a guest. We just did earnings for almost the entire show. Even with that, there were big, relevant companies that we weren't able to make time for. I wanted to get to two of them with you. That's ExxonMobil and Chevron.
Both reported last Friday, second quarter results for ExxonMobil and Chevron. ExxonMobil, profits up 18%, but you look at the refinery business, you look at the chemical business, there's still some weakness there. Chevron, their profit more than doubled from a year ago. Not that the stock took off, but it certainly went north, whereas ExxonMobil sold off a little bit. We can take these together, we can take them one at a time.
Muckerman: It seems like little bit of a tale of two companies. Both of them are integrated oil companies, so, you have the upstream, with the oil and gas exploration and production; and then the downstream, the refining business; and then, the chemical side of things. Typically, you see one of the businesses doing well and the other one doing poorly. In this regard, Exxon missed expectations across the board, all three segments missing expectations from Wall Street. I mentioned last week, I'm not too sure how accurate expectations are in the energy sector these days, because it's still in a state of flux with the price ramping up.
But, Exxon, the only supermajor that didn't have an announcement for a share buyback program. Chevron, after four years, reinstated theirs at about $3 billion. Buying back about 1% of shares, not quite as big as Caterpillar's $10 billion announced share buyback program that they're going to start at the beginning of 2019, but, still impressive for Chevron. Both the companies covering their dividend with free cash flow, which is not always the case with these big energy companies. A lot of times, they're paying that dividend out of debt. But with the price of oil doing what it's been doing over the last few months, both companies are free cash flow positive, even after dividends being paid. Some room there.
Chevron, kind of done with its big capital spending on long-term projects. They're going to be relying more on the Permian Basin and oil production to drive the needle over the next year or so. Their LNG build out in Australia, pretty much done. That's going to be coming online full force here in the next few months to a year.
If I was looking at either one of these companies to invest in, Chevron would certainly take the cake for me. Exxon seems too utility-esque, and maybe not even as strong of a performer as a utility. The size, too hard of a ship to steer. Capital spending, not what it was several years ago. Longtail projects, I worry about that, as well.
Hill: You look over the past year or so, and Chevron has absolutely been the better performer, the better operator, and it shows up in the stock performance. ExxonMobil is basically flat over the past year, and Chevron is up about 15-16%, something like that. Let's be clear, Chevron is a $200 billion company. It's not some young, nimble start-up.
Muckerman: Supermajor is a very accurate descriptor.
Hill: Right! ExxonMobil, somewhere around $350 billion. But, it's interesting. I remember years ago, you and I on this podcast, once we saw the price of oil starting to come down. We were talking, among other things, about, when you look out across this landscape, who's best positioned to deal with this? You said, "It's the bigger players. They have more in reserve, literally. They also have more cash. They can be pretty smart about acquisitions. This is one of those times when cash is king."
ExxonMobil is a behemoth and has earned its way to that status. Look, I'm not sitting here saying, "I think they're done at ExxonMobil." Of course, I'm not saying that. But it really does seem like they have some operational challenges that they have really not figured out in over a year.
Muckerman: You know, back then, when the price of oil was declining, they were the safer play. You saw the share price of these big companies not decline nearly as much as some more pure oil plays in North America. But, they just don't have that upside movement, either. That's why I think of these guys as more of a utility.
Exxon has become more natural gas-heavy than it has been in the last couple of years. That might be a little bit of a reason why they haven't had that upside with oil prices coming back from the $30-40 range, now up to the $60-70 range. That could be an issue. Yeah, if you're looking for some growth outside of just a dividend check, these aren't the companies you want to focus on.
But, I do think Exxon has a decent long-term outlook, when you look at the chemical side of the business. Regardless of what you think about the use of oil and demand for oil, the chemical side of things, I think, is going to continue to be a growing business. They've been investing a lot of money down on the Gulf Coast for their chemicals business. It isn't nearly as big as the oil side, but I think it might have longer legs.
Hill: I'm glad you mentioned Chevron's stock buyback. As you said, it's been years since they've done that. $3 billion buyback plan. Although, I did note that the company was asked if this was sustainable, and they said, "Yes, this is sustainable, as long as oil market conditions don't take a dramatic turn for the worse." I mean, that's smart of them. I don't begrudge them saying that.
I'm curious, when you think about the capital allocation of these two companies -- whether it's stock buyback plans or dividend plans -- it seems like, despite everything I just said about ExxonMobil, they have a better track record, certainly, on the dividend side of things, certainly a longer track record. I was talking to Jeff Fischer, right before we came in the studio, about this -- the thing about stock buyback plans is, companies announce them, and basically, when companies announce that, it's almost like, "This is our plan. It's not written in stone. We're going to do this." In the case of Chevron, they were very specific, "We're going to do this $3 billion plan, as long as it's sustainable."
But, there are companies out there that announce it, and then don't even come close to whatever the big, splashy number is. Again, it seems like ExxonMobil has that stronger track record, whether we're talking about buybacks or dividends.
Muckerman: It has a lot to do with free cash flow generation. When you look at Exxon, it's had positive free cash flow. It ebbs and flows, but they've had positive free cash flow since at least 2012. Chevron, you look a 2013 through 2016, they're in the red on the free cash flow line. Exxon has had a little bit more flexibility there. That might have a little bit more to do with size.
But you also have, Chevron was out there spending quite a bit of money on capital expenditures. I mentioned their LNG projects out in Australia and elsewhere. Not cheap projects that have been taking several years to finally come to fruition. Maybe that's where their cash was going, these bigger projects. Whereas, Exxon, paying a little bit more consistent dividend, and on the share buyback side.
Two different ways of spending cash. We'll see how well that LNG expenditure ramp that Chevron went on for several years pays off. I think it will, because natural gas and LNG are certainly becoming a bigger part of global trade. So, it'll take time to really prove that out. But, I think, you had two different uses of cash, and Exxon decided to return more of it to shareholders.
Hill: These are two of the biggest players in the industry. Is there an under-the-radar company that you like to watch going into earnings season in this industry?
Muckerman: BP is always an interesting story, ever since the terrible disaster in the Gulf of Mexico. I like them. They've streamlined the operations, because they had to. They had to sell off billions of dollars' worth of assets. A little bit smaller of an operation than they used to be. They just dropped $10 billion on North American shale assets recently, the largest M&A deal in the industry this year. They're trying to get back to that growth status. It's a company that I'd keep my eye on in the industry, if you want to get some oil and gas exposure.
Hill: Real quick, before we wrap up, shares of Viacom up 6% in the last three days. Viacom is the parent company of Paramount Pictures, which, of course, won the weekend with Mission Impossible: Fallout, which I haven't seen, but I need to.
Muckerman: It's in your future, though?
Hill: It's in my future. I have a kid at summer camp who is a huge Mission Impossible fan. I said, I won't go see it until you're back from camp. This is one of those things where, you look at the numbers of this movie, about $60 million here in the U.S., over $90 million international. It's like, oh, yeah, Tom Cruise is the biggest star in the world.
Muckerman: It's crazy. I was just going to look up how old the first Mission Impossible movie is.
Hill: I think it's 22 years. I want to say it was '96.
Muckerman: Yeah, you're right, it just came up, 1996. Good call. That's a crazy long timeframe for one man to produce all these movies. James Bond changed over every three or four movies. Tom Cruise is still here, 22 years later.
Hill: And doing the stunts. There's no green screen. He's actually jumping out of a plane.
Muckerman: It's wild.
Hill: Or, in the case of, what was it, the last one, hanging onto the side of a plane. Which, of course, is our logo here at Market Foolery. If you follow us on Twitter, we have Tom Cruise from the last Mission Impossible. Of course, Tom Cruise was replaced by Wilford Brimley.
Muckerman: He's on the side of the cargo plane, right?
Hill: Yeah, phenomenal. Taylor Muckerman, thanks so much for being here!
Muckerman: Appreciate it, Chris!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That does it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!