Margins matter. The more ConocoPhillips (NYSE: COP) 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. 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 ConocoPhillips's competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 ConocoPhillips

26%

8%

5.9%

 Chevron (NYSE: CVX)

32.3%

12.5%

9.2%

 ExxonMobil (NYSE: XOM)

32.3%

11%

7.8%

 NuStar Energy L.P. (NYSE: NS)

12.1%

6.4%

5.1%

 Hess (NYSE: HES)

21.9%

11.1%

4.9%

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

Unfortunately, that chart doesn't tell us much about where ConocoPhillips 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 ConocoPhillips over the past few years.


(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 32.4% and averaged 29.1%. Operating margin peaked at 15.3% and averaged 11.5%. Net margin peaked at 9.3% and averaged 4.1%.
  • Fiscal year 2009 gross margin was 26.9%, 220 basis points worse than the 5-year average. Fiscal year 2009 operating margin was 6.6%, 490 basis points worse than the 5-year average. Fiscal year 2009 net margin was 3.6%, 50 basis points worse than the 5-year average.
  • TTM gross margin is 26%, 310 basis points worse than the 5-year average. TTM operating margin is 8%, 350 basis points worse than the 5-year average. TTM net margin is 5.9%, 180 basis points better than the 5-year average.
  • LFQ gross margin is 26%, 30 basis points better than the prior year quarter. LFQ operating margin is 9.1%, 430 basis points better than the prior year quarter. LFQ net margin is 9.9%, 720 basis points better than the prior year quarter.

With recent 12-month-period operating margins below historical averages, ConocoPhillips has some work to do. There may be some hope in the last quarter's results, but only time will tell.

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. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at ConocoPhillips in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.