Has Ferrellgas 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 Ferrellgas (NYSE: FGP  ) 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 Ferrellgas.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.3% Fail
  1-Year Revenue Growth > 12% (3.5%) Fail
Margins Gross Margin > 35% 27.4% Fail
  Net Margin > 15% (0.5%) Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 0.85 Fail
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 10.4% Pass
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 7

Source: S&P Capital IQ. NM = not meaningful; Ferrellgas had negative earnings and shareholder equity net of minority interests as of its most recent report. Total score = number of passes.

Since we looked at Ferrellgas last year, the company has lost a point, as revenue shrank and profits went negative. The stock has also had its troubles, hugging the flat line over the past year.

Ferrellgas is the company behind the popular Blue Rhino line of propane tanks, which lets you buy or exchange tanks for your grill at grocery stores and other local retailers. Structured as a master limited partnership, Ferrellgas offers investors an amazing dividend yield of more than 10%, with payouts that have been stable for years.

But Ferrellgas stands out among its competition for a bad reason as well: debt. Competitors AmeriGas (NYSE: APU  ) and Suburban Propane (NYSE: SPH  ) have their share of debt as well, but they sport relatively strong interest coverage ratios and are thus in better position to maintain their debt. Ferrellgas, by contrast, has more difficulty meeting its interest obligations.

One promising area where Ferrellgas is looking for growth is its FerrellAutogas business. Just as Clean Energy Fuels (Nasdaq: CLNE  ) is working with Chesapeake Energy (NYSE: CHK  ) and other industry players to create a network of natural gas filling stations for gas-powered vehicles, Ferrellgas could successfully tap into the growing demand for cars and trucks using the cheaper, cleaner-burning fuel.

For Ferrellgas to improve, it needs to start first on getting its balance sheet in order. If it can get its debt under control, it'll be easier for the company to remain profitable and for the stock to move steadily closer to perfection over the long run.

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.

Ferrellgas is interesting, but Clean Energy Fuels is ahead of the curve on natural gas fueling stations. The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It is poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand new report. Just click here to get started.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Clean Energy Fuels. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels. 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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Related Tickers

9/19/2014 4:01 PM
FGP $28.06 Up +0.20 +0.72%
Ferrellgas Partner… CAPS Rating: *
APU $46.05 Up +0.24 +0.52%
AmeriGas Partners,… CAPS Rating: ****
CHK $24.67 Down -0.10 -0.40%
Chesapeake Energy CAPS Rating: ****
CLNE $8.81 Down -0.03 -0.34%
Clean Energy Fuels CAPS Rating: ****
SPH $45.20 Up +0.36 +0.80%
Suburban Propane P… CAPS Rating: ***

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