Taking Stock: Hess Corp. shares still fail to deliver

Malcolm Berko: Low profit margins also explain why Hess Corp. shares trade near book value, which is $68, whereas Exxon Mobil, Chevron and others trade at premiums to book.
Published: March 17, 2013

I didn't like the company in 2007, because I believed that management was weak and wobbly and unproductive. Little has changed. HES' consistently low 5 percent net profit margins (the litmus test of management skills) were then and continue to be among the worst in the industry. The net profit margins of Exxon Mobil, Imperial Oil, Occidental Petroleum, Petrobras and Chevron are nearly twice as high.

Low profit margins also explain why the shares trade near book value, which is $68, whereas Exxon Mobil, Chevron and others trade at premiums to book. And HES' debt, at 45 percent of capital, is substantially higher than that of Exxon Mobil, Imperial, Oxy, Chevron or Royal Dutch Shell. Now management has begun the process of selling noncore assets, which should reduce debt by 25 percent. Unfortunately, heavy near-term spending, a symptom of poor management, has turned cash flow negative. Fortunately, HES has an easily accessible $4 billion line of credit. I'm unimpressed!

Earnings for 2013 are expected at $6.30, from $5.83, and rumors suggest that the dividend, which has glued at 40 cents a share since 2002, may be increased this year. The Street's consensus points to a $75 price target; however, a small gaggle of evil-eyed hedge fund gargoyles believe that HES could trade at higher than $125, providing the Federal Reserve continues flooding the market with 85 billion new dollars every month. Don't add to your position. Keep those shares for four to six months, and watch the trading volume as HES peaks above the $75 mark. If HES fails to move convincingly above $75, sell it.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.

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