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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


April 6th 2012 Total
NYSE Symbol: Tot
Industry: Oil & Gas
Price as of 4/5: $49.87

The first quarter is over with the S&P 500 rallying 12%, its' best return in 14 years. Amazing. With the start of the second quarter, understandably investors are starting to take some profits ahead of earnings season. Earnings reports will start next week with many companies easily beating estimates, but the guidance for the second quarter and the rest of the year may be the bigger concern. Going forward, the utilities may perk up if the averages go into a correction. Another sector that has underperformed in the first quarter was energy. The energy sector may still come under pressure, but the valuations are much better than other sectors that have already appreciated. This week we'll highlight the largest French oil company that sprang a gas leak. The featured stock of the week is Total. Barron's wrote a positive piece on Total three weeks ago based on valuation before the company's gas leak. Since then the valuation has only improved. In the short term, the stock may come under more pressure particularly if the world economies slow further causing the price of oil to drop, but longer term the stock provides a great value with a great dividend.

In their initial bullish article, Barron's highlighted the company's low valuation to peers as one reason to buy the stock. A second reason to buy the stock was due to management's decision to spend big money to boost production while a third was new discoveries of oil and gas off the coast of Africa. Since then the gas leak at the Elgin Field in the North Sea caused the stock to fall another 5%. Barron's reiterated their recommendation this past week stating the sell off was unwarranted even in the worse case scenario for the gas leak. The Elgin Field only represents 2.5% of Total's production and could easily recapture the production from other projects if needed. But the most important point concerning the leak is there were no causalities and the leak was above water therefore no environmental impact like the BP spill. That says it all.

As Total's stock has declined, the valuation only gets better particularly compared to their biggest rival, ExxonMobil. The price-to-earnings ratio for Total is currently 6.8 and 6.6 times next year's earnings estimates. The price-to-earnings ratio for Exxon Mobil is 10.30, while the average price-to-earnings ratio for a stock on the Standard & Poors 500 Index is around 15. Foreign oil companies tend to trade at a discount to American majors which is fine, but probably not a 30% discount. The price-to-sales ratio for Total is 0.54 while Exxon Mobil price-to-sales ratio is 0.84. Total also trades for 1.3 times book value of $40 a share. With the recent sell off, Total's dividend yield now stands at 6%. The average dividend paid by a stock in the Standard & Poor's 500 Index is around 2% while ExxonMobil's dividend is just 2.17%. Short term, expect more volatility form the markets and Total's shares. But long term Total is a blue chip stock in the oil sector that provides a superior dividend yield to investors hungry for income.