Is Southwestern Energy Earning Enough for You?

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Margins matter. The more Southwestern Energy (NYS: SWN) 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. Healthy margins often separate pretenders from the best stocks in the market.  That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, comparisons with sector peers and competitors, and any trend that may tell me how strong Southwestern Energy's competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Southwestern Energy67.8%37.1%21.8%
 Spectra Energy (NYS: SE) 54.5%34.3%22.3%
 BP (NYS: BP) 15%7.7%6.4%
 Hess (NYS: HES) 20.2%9.1%5.1%

Source: S&P Capital IQ. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Southwestern Energy 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, the last fiscal year, and the last fiscal quarter. 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 Southwestern Energy over the past few years.

anImage

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable with the FY results preceding them. To compare quarterly margins with their prior-year levels, consult this chart.

anImage

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 71% and averaged 65.6%. Operating margin peaked at 40.6% and averaged 36.1%. Net margin peaked at 24.6% and averaged 17%.
  • TTM gross margin is 67.8%, 220 basis points better than the five-year average. TTM operating margin is 37.1%, 100 basis points better than the five-year average. TTM net margin is 21.8%, 480 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Southwestern Energy looks like it is doing fine.

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. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Have an opinion on the margins at Southwestern Energy? Let us know in the comments section below.

At the time this article was published Seth Jaysonowned shares of BP at the time of publication. You can view hisstock holdings. He is the co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio.Motley Fool newsletter serviceshave recommended buying shares of Southwestern Energy and Spectra Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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