The STRIDE Blog

Revenue is Vanity, Profit is Sanity

stride-revenue-is-vanity-profit-is-sanity-featuredEarlier this month, Broadview Networks released a map of the largest companies by revenue in each state of America. They searched through each state’s list of companies to find which had the largest revenue in the last fiscal year.

I found the study quite interesting and the total revenue staggering. The top ten largest companies by revenue amounted to a colossal $2.1 trillion, enough to buy Apple Inc. three times over. I am struggling to wrap my mind around such an enormous number.

Seeing how much revenue the top ten largest American companies generated in a fiscal year, tickled my interest. I was wondering whether these companies are good investment opportunities. They clearly know how to generate revenue, but can they create value for shareholders? Let’s see.

Largest Companies by Revenue in Each State 2015

Source: Broadview Networks

1. Walmart

Walmart, headquartered in Bentonville, Arkansas, was at the top of the revenue generators list for the fiscal year 2015. Walmart generated a revenue of $486 billion.

stride-revenue-is-vanity-profit-is-sanity-walmart-income-statement

From the above chart, provided by the STRIDE engine, we can see that Walmart has been growing the top-line at a slow and steady pace. We weren’t expecting tremendous revenue growth year-on-year, because of the industry in which Walmart operates. The retail industry weighs heavily on the overall performance of the economy and doesn’t typically show huge leaps in revenue gains year after year.

Compared to the previous fiscal year, Walmart managed to grow their top-line, but their bottom-line is still lagging. The margin of operating income has been on a downward trend since 2011, which means Walmart is increasing their revenues, but not making much additional profit from it. A margin of 5.59% means that for every dollar they earn, only five and a half cents falls in the Walmart bucket. They are putting in the effort, but not reaping the rewards.

The higher the operating income, the more profitable the business is likely to be. With Walmart’s margin declining, less money will be available to settle the company's debt, expand operations and to pay shareholders. Walmart may be the king of revenue generation, but the company isn’t creating value for its shareholders.

The real value lies in a business that can grow its profits and revenue simultaneously, develop itself by expanding operations, buy its shares back or reward its investors with dividends.

2. Exxon Mobil

Exxon Mobil, headquartered in Irving, Texas, is the world’s largest publicly traded international oil and gas company. According to the release, the business generated $412 billion in revenue in the fiscal year 2015. While the headline revenue figure is reported as $412 billion, the real number is actually $369 billion once you've stripped out government sales tax revenues (which aren't attributable to Exxon Mobil) and income from equity affiliates (which are reported under those companies).

stride-revenue-is-vanity-profit-is-sanity-exxon-mobil-income-statement

The income statement reveals the rocky rise and fall of the oil industry. The revenue of companies in the oil sector is directly associated with the price and the availability of the commodity. In this instance, supply is outstripping demand, which means the commodity is no longer valuable.

Exxon Mobil’s revenue declined from a high of $437.6 billion in 2011 to $334.4 billion in 2015 - a drop of $100 billion.

The profit stream is directly tied to the amount of revenue generated. As revenues decline, the margin follows, which is not a good sign. You can expect your operating income to decline when revenues decline, but the margin should stay consistent. With a margin of 10.49%, it is the lowest since 2010. We can conclude that the business wasn’t able to cut the costs of operations to balance its loss in revenue.

They managed to generate massive revenue, but in comparison to the previous five years, Exxon Mobil isn’t creating the necessary value for shareholders. The earning of companies in the oil industry are extremely unpredictable and do not serve as a low-risk investment.

3. Chevron

Chevron, headquartered in San Ramon, California, generated, according to the release, a revenue stream of $212 billion in the fiscal year 2015. While the headline revenue figure is reported as $212 billion, the real number is actually $192.3 billion once you've stripped out government sales tax revenues (which aren't attributable to Chevron) and income from equity affiliates (which are reported under those companies).

stride-revenue-is-vanity-profit-is-sanity-chevron-income-statement

Looking at the company’s income statement, you see a similar pattern because Chevron also operates in the oil industry. Chevron’s operating income margin is 10.24%, almost a 6% decline since 2011.

The same conclusion can be drawn here as with Exxon Mobil.

4. Berkshire Hathaway

Berkshire Hathaway, based in Omaha, Nebraska is one company on this list that does know how to create value for its shareholders. And the reason? They have none other than the Oracle of Omaha driving the ship and waving their flag.

Warren Buffett is undoubtedly one of the best investors of our time. As CEO of Berkshire Hathaway, he certainly knows which companies to invest in to keep his company flourishing and his investors happy.

stride-revenue-is-vanity-profit-is-sanity-berkshire-hathaway-income-statement

Taking the income statement into account, we see that Berkshire Hathaway has managed to grow its revenue and operating income simultaneously. The continuation of the uptrend is what we as investors want to see.

With this company it isn’t about vanity, but rather about a great investor, picking the right companies to grow the bottom line.

5. GM 

General Motors, headquartered in Detroit, Michigan, generated a revenue of $156 billion in the fiscal year 2015.

stride-revenue-is-vanity-profit-is-sanity-general-motors-income-statement

The income statement shows a positive trend in revenue growth. GM can sufficiently grow their revenue year-on-year, which is wonderful. Unfortunately, we can’t say the say for the bottom line growth.

Although GM managed to keep growing their revenue, they are struggling to make additional profit from the top line growth. As GM’s margins suggest, they are delivering more cars and making less money from it. Their operating income margin dropped significantly from a high of 4.62% in 2011 to a low of 2.01% last year. From 2013 to 2014 they managed to increase their total revenue but slashed their operating income in half.

The car manufacturing industry is an expensive one, as it takes a lot of time and money to produce vehicles. In GM’s current situation, they are increasing revenue to pay their executives and employees. GM only sees two cents of every dollar finding its way to the bottom line.

We can conclude that GM’s earnings aren’t predictable and that they aren’t creating value for their shareholders.

In Conclusion

From the top five largest American-based companies by revenue, only one company truly shows the ability to create value for its shareholders. This proves that revenue is merely vanity and can't be used as a measure of a company's ability to create value for its shareholders. Look past the gleaming revenue reports and drill down into a company's financials to find the bottom line, because that is where value investing sanity lies.

Featured image credit: Numbers And Finance via photopin (license)

Topics: Global Markets News, 3D Value Investing

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