One of the reasons the Dow Jones Industrial Average
But one of the interesting things about Dow stocks is that different companies have varying degrees of success in turning the revenue they generate into profit. Some businesses pull in more money than the gross domestic products of all but the largest nations on Earth, but relatively narrow margins mean that only a small portion of their sales fall through to the bottom line as profit. Other companies have far less revenue but do a much better job of converting it to net income, thereby bolstering their value despite their falling much lower down the Fortune 500 list.
What makes the Dow's biggest companies work
Today, I want to look at the companies in the Dow that have the highest revenue to see how good a job they do turning their sales opportunities into income. Among them are the top three companies in the Fortune 500, along with an industrial giant that's also been a household name for decades. By looking not just at their size but also at how they make their profits, you can get some insight into identifying the best investment opportunities in the Dow and beyond.
The Dow component with the highest revenue over the past 12 months is Wal-Mart. With more than $455 billion in sales, the company tops Fortune's Global 500 list of the world's largest corporations. Yet with a market cap of $223 billion, the company doesn't even crack the top three in the Dow in terms of total stock value. What gives?
The answer lies in Wal-Mart's low-margin business model. Retail is a cutthroat business, and Wal-Mart has thrived by offering lower prices than many of its competitors. But price-cutting leads to lower profits, and Wal-Mart's net income of just over $16 billion over the past year produces a profit margin of just 3.5%. Yet even though some of Wal-Mart's retail competitors post better margins, they don't have the sales volume to match Wal-Mart on the bottom line.
Just behind Wal-Mart is ExxonMobil, with revenue of almost $443 billion over the past year. In stark contrast to Wal-Mart, though, Exxon's 9% net margin reflects much greater net income from the oil and gas industry and is a big reason Exxon has a market cap almost 70% higher than Wal-Mart.
What Exxon lacks, though, is sales stability. As recently as 2009, Exxon's revenue was just $275 billion, with oil prices plunging during the financial crisis. As oil prices start to swoon once more, Exxon could see a big drop in both revenue and profit in 2012 if energy doesn't recover.
Chevron provides another example of how the energy industry has risen to dominance lately. Triple-digit oil prices pushed Chevron's revenue up by 50% since the post-crash 2009 year, and even though Chevron's $237 billion in sales over the past year is barely half of what Wal-Mart brought in, Chevron's profits of more than $27 billion helped give it a market cap almost as big as Wal-Mart has.
Chevron is also vulnerable to energy-price changes. It will be interesting to see how the company responds as the recent drop in oil below $85 per barrel starts to have a big impact on its financials going forward.
Finally, the No. 4 sales leader in the Dow takes in less than a third of its leader at $140 billion. But GE's business is by far the most diverse of the four, with divisions in everything from alternative energy to household appliances, aircraft engines to health-care equipment.
GE took a huge hit during the financial crisis as its consumer-finance division overextended itself badly. But in recent years, the company has recovered strongly, and looking forward, GE has a lot more control over its own destiny than it seemed to have back in 2008 and 2009.
Follow the leader
By itself, revenue doesn't guarantee success for a business. But these four Dow stocks have done such a good job of producing profit from their sales that they've become simply too big to ignore, and what happens with their revenue levels in the future will go a long way toward determining whether they'll continue to thrive.
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