All looks well at General Electric (GE - Annual Report).

The second quarter orders were a record, up 32%; we grew our backlog. We’ve got very strong global demand, up 21% in revenue. We continue our focus on margin expansion. Year-to-date we’re up 120 basis points; we’re up 70 basis points for the quarter. This is a big initiative inside the company, and one that we’re committed to….

Globalization and emerging markets, GE is very advantaged in these markets and these are just booming right now.

Infrastructure continues to be a real solid point for the company. Demographics as it pertains to both global growth and some of the action in GE Money is great. All of our focus on ecomagination, energy and investment/reinvestment is very solid.

If you look at what’s the same, we still see high liquidity in the marketplace. The U.S. consumer seems fine. Unemployment is at low levels, and we’re not seeing really any warning signs with the U.S. consumer….

On balance, we think we’re well-positioned in this environment. There’s no big surprises, and we feel like we’re in good shape as we look at the rest of the year.

(Excerpt from full GE conference call transcript)

Exxon Mobil (XOM - Annual Report) describes several reasons why investing in new projects can be risky, which helps explain why they haven’t invested as much as some would like (and why prices for oil are likely to remain high.)

Although increased volumes from the recent project start-ups in Russia, West Africa, and Qatar more than offset natural field decline, liquids production fell by 34,000 barrels per day, or 1% from the same quarter last year due to entitlement and OPEC quota effects in Africa….

ExxonMobile’s affiliate in Venezuela was not able to reach the agreement on the formation of a mixed enterprise and on June 27, 2007, the government took over our interest in the Serene rural project….

(Excerpt from full XOM conference call transcript)

And they didn’t even get to hurricanes, Iran, Iraq or terrorism. Makes you want to run out and drill an exploratory well, doesn’t it?

General Motors (GM) hopes to build a house of BRIC:

It was actually a very good quarter for other regions. Strong growth outside North America in the quarter, adjusted profitability of close to $700 million, $1.1 billion year-to-date. Revenue up 16%, share up 0.2%. I remind you our revenue does not include our business in China, as we carry it on the equity method so you would not see the growth in our business in China showing up in revenue. So this is really only on a consolidated basis.

Europe reported its best quarterly results since the second quarter of 1996, strong structural cost performance and favorable pricing. LAAM continues to leverage, it can only be termed explosive growth, reported the best quarter in ten years in both revenue and profitability. GMH reported a record second quarter adjusted net income with continued growth in China, India, and South Korea, as well as some improved performance in Australia….

Russia is a very fast-growing emerging market. 2.5 million units. It’s actually fast approaching one of the largest markets in Europe, actually, getting very close to France, Spain, Italy in terms of its size; and the U.K., as you can see. Our market share is up almost 4 points in Russia year-to-date.

Actually, we’re running behind in Brazil, we’re trailing in terms of market share in Brazil, but the driver of that is the market is up 50% in terms of its SAAR in the quarter. I would say the challenge in LAAM today is to keep up with the markets growth….

China, you can see the SAAR is up from 6.7 million to 8.3 million units. Our market share has not kept pace, so we’ve had some competitive pressures there, but nonetheless we’re still running pretty strong in China.

(Excerpt from full GM conference call transcript)

However, as if they needed any more challenges, they have subprime exposure that needs to be worked off.

ResCap lost over $900 million in the first quarter. We said that in the second quarter we expected that losses would narrow considerably and we expected better results. We did see that. Nonetheless, the $254 million is still a substantial challenge, it’s the largest business challenge for the GMAC management team in terms of restoring that business to where it needs to be. But it’s good to see the declining losses. We have sharply reduced our non-prime production, our non-prime exposure across warehouse lending, across some of our builder businesses. You saw run-off in the non-prime portfolio held for investment. We expect our run-off in the held for investment portfolio to be about $15 billion this year. So we’re basically reducing our exposure to non-prime and at the same time, we are seeing increased service fee income and lower structural costs.

So I would say the challenges continue here, but the first step in addressing the challenges is to stop deteriorating.

(Excerpt from full GM conference call transcript)

Citigroup (C - Annual Report) is also feeling the heat.

Net credit losses were up by $259 million, driven primarily by our global consumer business.

In consumer, key drivers are higher balances from organic portfolio growth and acquisitions; continued deterioration in the second mortgage portfolio; and the impact of the gray zone in Japan. In markets and banking, we continued to see a stable credit environment.

The third component is a $465 million net increase in the loan-loss reserve. There were two major drivers of this increase. First in the U.S. Cards business, the increase was driven by a change in the estimate of loan losses that are inherent in the portfolio. It is important to note that the underlying credit metrics have remained largely stable in our cards business. This reserve build reflects our focus on staying ahead of the visible credit trends, by considering as many factors as possible in establishing our reserves.

Second, in the international cards business, portfolio growth and seasoning and the impact of recent acquisitions resulted in higher reserve levels.

(Excerpt from full C conference call transcript)

Wal-Mart’s (WMT - Annual Report) customers are feeling the pinch.

Consumers today are pressed by a number of factors. Higher energy, higher gas prices and higher interest rates are all stretching their paychecks. Families with school-aged children are expected to spend more than $500 this year on back-to-school products. Our price campaign is designed to make a difference for families by saving them money where it counts most: on items like backpacks, pencils and socks. We’re encouraged by the response we’re seeing in back-to-school in August. 14 states have tax-free days during the start of this month. In addition, several states have delayed some school openings and we expect the trend we have seen with other seasons to continue. People are buying closer to the event.

As reported by other retailers, we’re experiencing similar trends in soft sales of home products driven by the slow down in housing. In addition, Wal-Mart’s softness in the home and apparel categories has been compounded by the difficulties we have had this past year and have shared with you. The result is that home and apparel remain soft through the second quarter. We’re starting to see some improvement in certain home categories this month and we are pleased so far with the sales results and customer response to the test of the New Home that we are piloting in several markets.

We continue to see pressure in all areas of apparel and continue to take pricing actions needed to sell through our inventory. We’re seeing some positive trends in sleepwear and men’s sports apparel. In the children’s areas, licensed apparel is picking up momentum and as I mentioned earlier on, we do expect our kid’s apparel categories to rebound this month.

(Excerpt from full WMT conference call transcript)

I guess it is not surprising that the top companies are seeing an outlook as mixed as that of the overall economy.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

In addition to comparing a single company’s performance over time, common size analysis can be a useful way to compare the performance of two or more companies with each other. However, this is not as easy as it may seem. For one thing, not all companies use the same reporting categories. Even if similar expense categories are used, one company may classify certain costs in a different category. For example, some companies include some or all of their depreciation expense within cost of sales, while others separate it out as a line item.

Exhibit 1 presents a side-by-side comparison of Total SA and and Exxon Mobil vertical common-size income statement data for 2006. Notice that Total reports higher “other operating expenses” than Exxon’s “production and manufacturing expenses” when measured as a percentage of sales. However, Total shows no category for “selling, general and administrative expense,” which it appears to include within that “other operating expenses” line along with production and manufacturing expense. To compare the performance, the investor must add Exxon’s production expenses (8.1%) to SG&A expenses (3.9%) to arrive at a category similar to Total’s “other operating expense.” On this basis, Exxon Mobil spent 12.0% on the category while Total spent 12.7%.

Exhibit 1: Cross Sectional Common Size Income Statement for Total SA and Exxon Mobil

Other issues include differences in accounting methods. We discussed the fact that beginning in 2006 Exxon Mobil must record the full estimated amount of its pension shortfall, whereas before it was only required to recognize a portion of it. Under International Accounting Standards, Total still reports just a portion of the expense, so the two are no longer comparable on that basis.

Companies can also employ different business models. We earlier compared the fixed cost structure of Landstar (LSTR - Annual Report) and Arkansas Best (ABFS). Because of their different business models, the cost structures may also differ. Landstar pays its drivers a percentage of the revenue from each load, whereas Arkansas Best pays drivers per mile driven. Arkansas Best may be able to reduce driver pay, while for Landstar the pay varies with revenue and is therefore something they would want to maximize in absolute dollar terms.

For these reasons, investors should have a solid understanding of any differences in accounting methods between companies being compared. Additionally, it is usually preferable to compare more broad based common-size data rather than line-by-line comparisons. Generally speaking, operating margin, pre-tax margin and net profit margin are more comparable between firms than, for example, gross margin or SG&A expenses.

In the case of Total SA and Exxon Mobil, Exxon appears to have higher operating margins – primarily due to lower purchases of crude inventory as a percentage of sales. Given its larger size, it is probably able to produce more of its own requirements. Other operating items appear relatively evenly matched, once some categorization adjustments are made.

Exxon also has lower sales-based taxes and more “other income.” While the taxes are a fair issue, it is probably not fair to judge management performance on the basis of non-operational items. However, regardless of the sources Exxon Mobil clearly appears to return a higher percentage of sales to its shareholders.

We can also compare both companies to industry data. For example, Yahoo! Finance reports key industry financial ratios, with the data provided by Hemscott Americas. Here is a selection of the industry data they provided for the Major Integrated Oil & Gas Industry recently. It is important not to take such third-party data at face value, however. A reader pointed out to us that Hemscott lists two separate market capitalizations for Total. Using the wrong one will result in the ratios being calculated improperly.

Exhibit 2: Industry Financial Data

The net profit margin given for Exxon Mobil and Total SA are similar to those we calculated, despite being made on the basis of the most recent quarter rather than the full year 2006. We can easily see that Exxon’s net margin was higher than the 10.3% industry average, while Total’s was lower.

We can also compare the debt to equity ratios of the firms and industry using this data. We find that Total SA has more debt than average, while Exxon has less. Finally, we can compare return on equity (see Chapter 6), which combines net income (an income statement item) with total equity (a balance sheet item.) Although both companies have higher returns on equity than the industry average, Exxon’s is the better of the two.

Overall it appears that Exxon Mobil is using its resources more effectively than Total.

Below we provide common-size income statement and balance sheets for ExxonMobil. Under U.S. GAAP, Exxon provides three years of income statement data and two years of balance sheet data.

Exhibit 1: Horizontal Common Size Income Statement

Exhibit 2: Vertical Common Size Income Statement

Exhibit 3: Horizontal Common Size Balance Sheet

Exhibit 4: Vertical Common Size Balance Sheet

Initial Assessment
For the most recent year, 2006, Exxon Mobil’s revenues (sales) rose just 1.8% (Exhibit 1) while total assets rose a larger but still modest 5.1% (Exhibit 3). This indicates a modest deterioration in operating efficiency.

Income Statement
ExxonMobil’s horizontal common-size income statement is presented in Exhibit 1. The vertical common-size income statement is presented in Exhibit 2. Revenue grew 23.2% in 2005 but cumulatively grew just a little more. Surprisingly, management’s discussion and analysis (MD&A), makes no comments regarding the significant revenue growth in 2005. However, given the similarity to the growth rate experienced that year by Total SA, it seems likely to have had the same underlying cause: higher oil prices. This is supported by the increase in the cost of crude oil and product purchases (Exxon purchases some of the oil used in its upstream operations) which rose substantially in 2005 but declined slightly in 2006.

Nearly all of ExxonMobil’s other operating expenses rose at a slower rate than sales. Only crude oil and production and manufacturing expenses rose at a faster rate. Selling, general and administrative expense was virtually a fixed cost, as was exploration expense. Given the large increase in oil prices the lack of new exploration is somewhat surprising. Typically one would expect the higher profits to attract capital (which in turn would increase supply and help control the prices.) The largest oil company is spending little incremental capital to find additional supply, which could suggest that the high prices will persist.

Because the costs in aggregate rose at a slower rate than sales, the net profit margin for ExxonMobil increased steadily from 8.7% in 2004 to 10.1% in 2005 and 10.8% in 2006.

Balance Sheet
Exxon Mobil’s horizontal common-size balance sheet is presented in Exhibit 3. The vertical common-size income statement is presented in Exhibit 4. The financial statements present only two years of balance sheet data, which is the norm. Investors would have to search prior year documents to compare longer-term trends.

For 2006, total assets increased by 5.1%, which is somewhat more than the 1.8% growth in revenue. Overall the company made slightly less efficient use of its assets in 2006.

Assets
Cash and cash equivalents were reduced by 1.5% during the year. Although the company generated more than $49 billion in cash from operations, it used nearly $30 billion to repurchase shares, $7 billion for dividends and $15 billion to invest in equipment. Restricted cash was generally unchanged. As a percentage of total assets, the combined restricted and unrestricted cash fell from 16.0% to 15.0%.

Notes and accounts receivable increased 5.3%, in line with total assets but at a faster rate than the sales that resulted in the receivable. When receivables grow faster than sales it could indicate that the company is having trouble collecting from customers, is offering more lenient credit terms, or simply that more of the sales took place later in the accounting period. Each of those can sometimes be innocuous and can sometimes indicate deteriorating earnings quality. It is up to investors to smoke out the underlying cause and evaluate whether it is significant.

Inventories rose 14.4% for crude inventory and 18.1% for materials and supplies, both of which are considerably faster than either sales or assets. As is the case with accounts receivable, inventories are often tied to the level of sales. Large increases in inventory at a retailer would typically be cause for concern – namely that the company chose poor-selling merchandise. However, since Exxon’s inventory is primarily a commodity, there isn’t that issue to contend with. Even if sales slow down, the inventory will remain valuable. In fact, if oil prices rise the inventory will increase in value, and the larger dollar value of inventory likely consists at least in part of the same quantity of oil marked to a higher value.

Prepaid expenses were close to unchanged, and total current assets rose 3.3% – almost exactly in the middle between the growth in sales and the growth in assets.

Investments and advances rose 12.8% and finished 2006 at 10.6% of assets, up from 9.9% in 2005. Property, plant and equipment rose at a slower rate, but still faster than either sales or assets. The lack of new exploration noted above has not prevented the company from investing more in existing fields or other operations. Other assets declined year/year.

Liabilities
Notes and loans payable declined 3.9% in 2006 as maturing long-term debt was repaid and replaced with debt of longer maturities.

Accounts payable increased 8.2%, which was faster than assets and sales but in line with the growth in inventories. If inventories were purchased late in the year it could result in higher accounts payable for any inventory purchased on credit. As a percentage of assets, accounts payable represent 17.8%, compared to 17.3% the preceding year.

Income taxes payable fell 4.6%, and in aggregate current liabilities grew at approximately the same rate as total assets.

Turning to long-term liabilities, long-term debt and the portion of earnings owed to minority investors grew a bit faster than total assets, while deferred tax liabilities declined. The most significant change related to postretirement benefit reserves, which increased 36.3% year/year and represented 6.4% of total assets in 2006 compared with just 4.9% in 2005.

The reason for the significant pension obligation increase in 2006 was primarily a change in accounting principles. As the company explains in its 10K:

Effective December 31, 2006, Exxon Mobil Corporation implemented FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (FAS 158), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other nonowner changes in equity. In 2006, the amounts recorded in other nonowner changes in equity for net actuarial losses and prior service costs are required by FAS 158. For 2005, FASB Statement No. 87, “Employers’ Accounting for Pensions,” required an employer to recognize a liability in its statement of financial position that was at least equal to the unfunded accumulated benefit obligation for defined benefit pension plans.

The plans themselves did not change, merely the way they are recognized on the financial statements. In 2005, Exxon did not have to recognize its entire shortfall (the difference between the current value what it is expected to pay out in future benefits and the assets available to cover the expenses) on the balance sheet. In 2006 and future years it must.

Largely due to the difference in reported pension obligations, total liabilities grew as a percentage of total assets from 46.6% to 48.0%. In aggregate, all other liabilities declined relative to assets.

Stockholders’ Equity
In 2006 Exxon Mobil issued new stock, increasing its common equity by $309 million. This amount most likely reflected changes resulting from stock based compensation. The company repurchased $28 billion worth of stock for the treasury account.

The significant share buyback negated most of the other contributions to shareholder equity, resulting in a modest 2.4% increase for total shareholder equity. As a percentage of assets, shareholder equity declined to 52.0% from 53.4%. Still, it represents the largest source of capital for the firm.