Gushing Praise for Exxon Mobil; for CMGI, Is It Now or Never?

Exxon Mobil (XOM) Jim: Buy

Mike: Buy

Jim: Given the sticker shock at gas stations these days and the soaring price of crude oil, several readers wanted to know whether a big oil stock is a good play.

Mike: Good question, Jim, and when it comes to Big Oil, they don’t come much bigger than Exxon Mobil. It was formed by the 1999 merger of those two oil giants--a deal worth about $75 billion--and is today the largest publicly traded oil company in the world.

Jim: Right, the company has a total stock market value exceeding $300 billion. So we figured Exxon Mobil is a good proxy for this whole energy situation. Now, as I’ve said before, my main gripe with oil stocks is that they’re often just shadows of the price of oil. Crude prices go up, the stocks go up, and vice versa, regardless of how the companies themselves are faring.

Mike: So the question is, where in this great oil-price cycle are we? My answer: The cycle is still ratcheting up, and we’re going to stay at this level of the oil-price stratosphere for some time.

Jim: I’m with you. Now, as everyone knows, crude prices have soared this year to levels not seen since the Persian Gulf War in 1990-’91. That has naturally helped Exxon Mobil and other oil companies generate record earnings this summer. But for many of the companies, it hasn’t affected their stocks much, or not as much as you might expect.

Mike: Meaning the stocks still have a ways to go.

Jim: One reason many of the stocks haven’t rallied much is because many people expect oil prices to drop again sooner or later--as oil prices always seem to do. So investors are bracing for a pullback in the companies’ profits, which in turn can crimp their plans for spending on exploration and new production.

Look at Exxon Mobil: Despite high oil prices, the stock has gained all of 6% so far this year. Big deal.

Mike: But a couple of things are likely to happen from here on. No. 1, I don’t believe that oil prices are going to drop with any great speed for at least the next 18 months. Also, you need to look at Exxon Mobil as more than a proxy for the cyclical price of oil: Exxon Mobil is still squeezing out savings and efficiencies from its merger, which will fatten its profit margins.

Jim: This is getting scary, Mike, because I totally agree with you.

Mike: Just don’t start wearing the same blue shirt and chino pants on the days I do.

Jim: You’re right, I think oil is going to stay up--even though it has dropped back a bit from its highs lately, thanks in part to the government’s plan to release some oil from the federal strategic reserve.

I also agree that there are still a lot of costs to be taken out of Exxon Mobil that will--I’m sorry--pump up its earnings. Exxon Mobil is on a mission to get its costs down, and its profitability per barrel up, to the point where it doesn’t have to worry much about the rise and fall of crude prices.

All of which is why I’d buy the stock.

Mike: Me too. Look, despite the stock’s modest gains this year, investors are getting pretty excited about oil stocks in general. Yes, there has been some profit-taking in the last week or so, but I think many investors will continue to troll the Oil Patch looking for good stocks.

Now, the rap on Exxon Mobil and other big companies like Chevron is that their price gains are going to lag smaller companies. And it’s true, shares of some of those smaller companies have performed better this year. Even so, this is a good stock to own for the long term.

Jim: That’s a stupid rap, but you’re right, it’s out there. Get this: I’m looking at one analyst’s report that advises avoiding Exxon Mobil because--are you ready?--its price has gone up so much already. What?! The stock is selling for all of 20 times the per-share profit Exxon is expected to earn this year, and that expectation has risen steadily all year. No, this stock has a nice price tag on it.

Mike: Also remember that Exxon Mobil has little debt for a big oil company. So it has a very healthy capital structure, which gives it the financial muscle to spend more for finding oil or to buy back its stock, as it has done.

Jim: This is a stock for those who want to sleep at night and not give a flip about OPEC or crude prices or even the price at the pump.

CMGI (CMGI)

Jim: Don’t buy

Mike: Buy

Jim: So now we go from the stodgy to the cutting edge with CMGI Inc., except it seems to me that the “edge” now is just nicking CMGI’s investors, and they’re dying from a thousand cuts.

Mike: Please, did you write this down before you got here? Anyway, there’s always lots of Bactine around my house.

Jim: Don’t tell me you like this stock?

Mike: First of all, we alluded to Exxon Mobil as a proxy for oil prices, and certainly one can say CMGI is an accurate proxy for the Internet economy.

Jim: Right; CMGI, in effect, is an Internet conglomerate, or you might say it’s almost a mutual fund, filled with its ownership stakes in dozens of “dot-com” companies.

Mike: If you said that to David Wetherell, who’s the chairman and co-founder of CMGI, he’d want to take you out back to the woodshed. Wetherell sees CMGI as an operating company, not a mutual fund.

Jim: Well, before he worries about how I view his company, maybe he should take another look at CMGI’s stock price this year.

Mike: Now, now Jim. Past performance is no indication of future performance, blah, blah, blah.

Jim: Why don’t you just explain exactly what CMGI does.

Mike: OK, CMGI basically buys sizable pieces of high-tech companies, particularly those in the Internet space. It’s got companies involved in content, meaning that they put information on the Web. It has firms that help other companies with Internet infrastructure; that is, with the basic technology of communicating over the Web. And it has companies that provide services for companies that want to get on the Web.

Jim: And CMGI has the search engine Alta Vista, which fetches what you want on the Internet. Now, CMGI was a good idea in the late 1990s, because the dot-com craze made CMGI’s stock a must-have investment. In 1999 alone, this stock--adjusted for splits--went from about $13 a share to $113. Then as the wheels came off the dot-coms this year, CMGI crashed too. Its stock has lost 75% of its value so far this year, and that, by the way, amounts to about $37 billion of stockholders’ wealth that’s vanished. And Wetherell would take me out back for complaining?

Mike: Jeez, don’t take it personally.

Jim: All I’m saying is that the chart of CMGI’s price looks like Old Faithful.

Mike: But I’d buy it. No question, this is not a risk-free stock by any means--and it won’t go higher without shareholders having to buckle up in the coming months or even years. But then again, we’re not talking about Treasury bills.

Jim: Yet you’d still buy it?

Mike: Yes, because CMGI is taking serious steps to get profitable, and that’s the Holy Grail now in the Internet industry. CMGI is reorganizing its businesses into four or five particular lines, with the idea that when some of those start generating consistent earnings, they’ll be easy to spot. That, in turn, makes it easier for investors to see what CMGI is achieving.

Jim: It’s about time, because CMGI’s bleeding red ink. Last week, it announced that for its fiscal year ended July 31, it lost--Mike, are you listening?--$1.4 billion.

Mike: A mere bag o’shells.

Jim: Yes, its revenue skyrocketed nearly fivefold from the prior year, to $898 million. But even though it’s restructuring, I have grave doubts about if or when CMGI as a whole can consistently make money. This company, despite the plunge in its stock, still has a market value of $11 billion, and I don’t think its prospects justify even that sum.

Mike: If you believe that the Internet is going to keep exploding, and everyone on the Web is going to keep needing services, then look at CMGI: It has everything from advertising companies to hardware and software companies, and they stand to benefit. Sure, you’ll need a strong stomach, but it makes sense to get into CMGI at this point.

Jim: But how in the heck are we supposed to even start evaluating this outfit? It owns all these different companies in different segments of the Internet sector, they’re all at different phases of their early corporate development, and few make any money. At least with the old conglomerates, like ITT, there were earnings you could put your finger on.

Mike: Oh, come on. ITT owned everything from hotels to telephone companies to Wonder Bread. Putting your finger on where its earnings were was like putting your finger on a gob of mercury.

Jim: But so what? ITT made money. Mike, I wouldn’t discount CMGI being one of the survivors of the Internet sector. But for at least the foreseeable future, only the strong and profitable are going to get investors’ attention. In the meantime, CMGI has to earn back their trust.

Mike: So at what point do you get into CMGI?

Jim: Not now.

Mike: You want to wait until it’s back at $150 and say, ‘Gee, that looks like a good stock’?

Jim: Are you kidding me? $150?

Mike: Call me an optimist.

Jim: How about I call you insane?

Mike: CMGI has a strong vision and good game plan, and its stock is going to start moving up long before CMGI’s improvement shows up in its quarterly financials.

And look at its portfolio: I don’t see a lot of Web pet stores or other nonsense. These are serious enterprises. One more thing: Because CMGI has cashed out some of its early holdings, it has close to $2 billion in cash. That’s enough of a cushion to let it find the formula for success in the next two years, even if it doesn’t make a profit in that time.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).