Has Enterprise Products Partners Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Enterprise Products Partners (NYSE: EPD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Enterprise Products Partners.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 24% Pass
  1-Year Revenue Growth > 12% 30% Pass
Margins Gross Margin > 35% 6.7% Fail
  Net Margin > 15% 3.5% Fail
Balance Sheet Debt to Equity < 50% 133.3% Fail
  Current Ratio > 1.3 0.83 Fail
Opportunities Return on Equity > 15% 14.5% Fail
Valuation Normalized P/E < 20 29.55 Fail
Dividends Current Yield > 2% 5.2% Pass
  5-Year Dividend Growth > 10% 6% Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Enterprise Products Partners last year, the company has lost a point. An increase in sales growth hasn't been enough to offset falling returns on equity and a big rise in its valuation.

Conditions have never been better for the natural gas storage and delivery industry. With massive activity in gas drilling, pipeline companies like Enterprise have thrived.

In particular, Enterprise has entered into a number of agreements with exploration and production companies, especially in the Eagle Ford play in southern Texas. Deals with Chesapeake Energy (NYSE: CHK  ) and EOG Resources (NYSE: EOG  ) to provide midstream services to the Eagle Ford players should benefit the company in the long run. Moreover, a deal with Enbridge and Anadarko to develop a natural gas liquids pipeline will allow Enterprise to play in the burgeoning liquids space, which benefits from higher prices than regular natural gas.

But there have been shakeups in the business that could affect Enterprise going forward. The buyout of El Paso should make Kinder Morgan Energy Partners (NYSE: KMP  ) a force to be reckoned with in the pipeline business. With Kinder already boasting a higher dividend yield and stronger margins at a cheaper valuation, the growth that will come from the combination could put a lot of pressure on Enterprise going forward.

Moreover, the company has an ongoing dispute with Energy Transfer Partners (NYSE: ETP  ) over a proposed pipeline from Cushing to Houston. When Enterprise made its deal with Enbridge, it left Energy Transfer in the lurch, prompting a lawsuit.

The midstream gas industry is very strong, but Enterprise has some work to do to reach perfection. As the industry gets more competitive, though, it may get even harder for Enterprise to make headway.

If you want a company that's really taking advantage of natural gas, don't miss our latest special report on energy. In it, you'll learn about a natural-gas game-changer that's ready to profit. Read about it right here, but don't wait -- it's free but only available for a limited time, so get it today.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Enterprise Products Partners to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Enterprise Products Partners. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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