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Is Enterprise Products Partners the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Enterprise Products Partners (NYSE: EPD  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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% 23.5% pass
  1-Year Revenue Growth > 12% (5%) fail
Margins Gross Margin > 35% 7.3% fail
  Net Margin > 15% 4.5% fail
Balance Sheet Debt to Equity < 50% 129.7% fail
  Current Ratio > 1.3 1.00 fail
Opportunities Return on Equity > 15% 16.8% pass
Valuation Normalized P/E < 20 19.99 pass
Dividends Current Yield > 2% 5.7% pass
  5-Year Dividend Growth > 10% 6.6% fail
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Enterprise Products Partners scores just four points. But even though Enterprise doesn't fit naturally into the perfect-stock framework, the natural gas storage and transport company has plenty of things going for it.

Times have been tough for natural gas producers. Gas-focused players Chesapeake Energy (NYSE: CHK  ) and Ultra Petroleum (NYSE: UPL  ) have seen their stocks languish over the past five years, as numerous new shale gas plays added to a glut of the clean-burning fuel. With Enterprise, however, its pipeline and transport business are based more on volume than on price. As a result, Enterprise's bottom line isn't as sensitive to the slump in gas prices as other companies in the industry.

Over time, Enterprise has rewarded investors. Back in 2004, the Fool's Income Investor newsletter recommended the stock, arguing that as a master limited partnership, Enterprise stood to benefit from favorable tax deferral provisions as well as increased energy activity. The stock has doubled since the initial recommendation.

What's unclear, though, is what the future will bring for Enterprise. The company recently did a secondary stock offering, raising just more than $500 million to help pay down a bit of its hefty debt load. Yet the debt is par for the course for the industry; in fact, pipeline competitors Kinder Morgan Partners (NYSE: KMP  ) and Spectra Energy (NYSE: SE  ) both have worse debt-to-equity ratios than Enterprise.

Enterprise's business may not be the most exciting in the world, but the results for investors speak for themselves. Even though it doesn't meet all of our perfect stock criteria, long-term shareholders couldn't have asked much more from Enterprise.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Enterprise Products Partners and Spectra Energy are Motley Fool Income Investor recommendations. Chesapeake Energy is a Motley Fool Inside Value selection. The Fool owns shares of Devon Energy. 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.

Read/Post Comments (1) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2010, at 12:39 PM, trenton1ryan wrote:

    This is a solid stock and investment. Don't worry about the 4 out of 10 thing above. MLPs carry more debt than average, as indicated by the author.

    Dan Duncan built this company into a powerhouse. His family (he died recently-in the spring I think) still owns a ton of shares. Their divvie (distribution actually) is solid, and, rest assured, they will keep raising it too. With natural gas prices low, they don't have as much pricing power as they could, but that will change as we accept the reality that we need (and will) to find more uses for all the natgas we have under our soil. As demand and use increase going into the future, so will EPD's revenues.

    As far as the pps doubling since a MF rec in '04 (wow...2004 seems like a hundred years ago, doesn't it?), I started buying in Jan '09 at around $21.95, and bought all the way up to about $29 (I sold around $36). It's practically doubled since then, so that would seem to suggest that the pps went sideways (?) between '04 and '08. I haven't looked at a chart going that far back, but one of us is missing something here (heck, maybe it's me-lol).

    Anyway, solid stock with years of growth ahead of it. One thing to watch for is rising interest rates. Sooner or later, our bond vigilante friends will force us to go higher. As the cost of borrowing increases, MLPs will feel the pinch. The strongest will pay down debt while it's still cheap. Those highly (higher than normal for this sector) leveraged will feel pain, and probably have to dilute unless natgas prices skyrocket (or oil does if their also in that business).

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