The concern, apparent in most oil-industry multiples, is that crude prices will peak, in which case the total number of industry drilling-rig orders -- which stood at 158 in January, up from 29 in April '05 -- will fall.
Oil's seemingly inexorable rise has sparked fierce debate, however. "Hundred-dollar-plus oil is a clear indication that worldwide demand for oil is continuing unabated," says Gary Russell, a senior equity analyst for the AIM Energy fund. "The industry is going to need many, many, many more rigs to find oil supply, to keep up with demand."
One sign of the company's confidence: National Oilwell has ignored pressure to buy back shares and instead has used its cash to expand its business. "The world needs more oil and gas," says Miller. "The worldwide rig count will climb in the next 10 years."
Schlumberger
No. 4-ranked Schlumberger, a leader in oil services, also makes Houston its home. The company's expertise in servicing rigs is in much demand right now, given the climbing rig count and Schlumberger's technological prowess in extracting hard-to-reach oil and gas, especially from older wells.
Schlumberger has been planning for today's sizzling market. In 2004 it studied the industry's supply and demand dynamics and saw more investment was needed, says CEO Andrew Gould. Demand for oil has soared due to the growth of China, India and other emerging markets, while supply growth has been constrained by the advancing age of many of the world's oil fields, some over 30 years old.
Schlumberger's bottom line has swelled as the good times have rolled. Revenue grew an eye-popping 21% in 2007, to $23.3 billion; net income jumped 40%, as did earnings per share of $4.20. Since Schlumberger's business isn't capital intensive, its cash flow tends to increase in step with revenue growth. Its shares jumped 42% in the past 12 months, to a recent 105. The company says it expects to grow revenue at a high-teens rate from 2004 through 2010. "We should sustain relatively high growth rates beyond the end of the decade," says Gould.
An increase in exploration, spurred by the need to find new sources of oil and gas in the next three to five years, will benefit the company. "The market is going to be surprised by the extent to which drilling is going to have to increase," Gould predicts.
Schlumberger typically trades in tandem with oil prices. "There's so much speculation in the (oil) market, it reminds me of the tech bubble," says Doug Lane of Douglas C. Lane & Associates, a New York-based money manager that owns Schlumberger shares but has been reducing its position.
Those who think crude is heading higher, however, may find the stock a bargain, even at 17.5 times 2009 estimated earnings of $5.90 a share.
Charles Schwab
Five years ago Charles Schwab was nearer the bottom of the Barron's 500 than the top. The company owes its comeback -- operationally and on our list -- in part to the efforts of Charles Schwab himself, the brokerage's 70-year-old founder.
The chairman regained the CEO title after the board ousted then-CEO David Pottruck in July 2004. Revenue and profits since have grown nicely, even though Schwab has shed some large business lines and had to weather a declining market.
The San Francisco-based company has slashed costs and sold its U.S. Trust and capital-markets units. As a result of cost cutting, its expenses as a percentage of client assets are 0.22 of a percentage point, compared with 0.23 of a point last year and 0.25 in '06, according to Richard Repetto, an analyst at Sandler O'Neill. The numbers are small but the impact isn't; last year the company grew revenue by 16%, to $4.99 billion, and earnings per share by 33%, to 92 cents.
Schwab has been successful in attracting new assets, partly because of the travails of competitors such as Merrill Lynch and Citigroup on the high end and E*Trade in the discount market. Yes, the Schwab YieldPlus Fund, a short-term bond fund, owned mortgage-backed securities, incurred losses and redemptions, and now faces investor lawsuits. But the company's earnings aren't expected to be dented.
"Ethics, integrity, consistency and the way we've treated our clients over many years has led people to understand this is a safe place to do business," says Charles Schwab.
If the market is flat this year and the targeted federal-funds rate stays at 2%, Schwab has warned earnings might only rise 7% to $1.05 a share, five cents below an earlier target based on a higher market and 4.25% fed-funds rate.
Longer term, Charles Schwab says the company, with $1.4 trillion in assets, has lots of room to grow. In the U.S. alone there are $25 trillion to $30 trillion of assets managed by people who could use Schwab's services, he notes, adding "there's still a very big opportunity left."
That's true, as well, for most of the Barron's 500.
Barron's 500 Methodology
Credit Suisse Holt, a unit of Credit Suisse, uses four equally weighted measures to grade and rank the largest companies (by sales) in the U.S. and Canada that trade on U.S. exchanges. For each company, Holt calculates stock-price performance relative to the Standard & Poor's 500 Index (for the 52 weeks ended May 2); the median cash-flow return on investment (CFROI) for the past three years, stripped of the effects of inflation and accounting practices; CFROI in the latest fiscal year, adjusted for divestitures. For financial companies, Holt calculates cash-flow return on equity.
Each company is graded in four categories; the top quintile in each category gets an A, the bottom quintile an F. Holt then calculates a total grade-point average, or GPA, for each company, with 4.0 the highest. In the case of the GPAs the "winner" is the company with the greatest change in cash-flow return on investment (or equity) in the past year. The Barron's 500 excludes any otherwise eligible companies that are restating financial data, operating under bankruptcy protection, have been acquired or are subsidiaries of foreign companies.