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 and then decide whether McDermott International (NYSE: MDR ) 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 McDermott International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.1%||Fail|
|1-Year Revenue Growth > 12%||4.1%||Fail|
|Margins||Gross Margin > 35%||19.3%||Fail|
|Net Margin > 15%||6.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||4.8%||Pass|
|Current Ratio > 1.3||1.71||Pass|
|Opportunities||Return on Equity > 15%||13.9%||Fail|
|Valuation||Normalized P/E < 20||14.41||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of only 3, McDermott International is far from perfection. The energy engineering company has gone through a rough time lately and still has work to do to build its business back up.
McDermott operates worldwide providing engineering and construction work with an emphasis on offshore oil and gas projects. Just like fellow engineers Foster Wheeler (Nasdaq: FWLT ) and Fluor (NYSE: FLR ) , McDermott benefited from the boom in global infrastructure development during the heady years before the financial crisis. As recently as March, the company saw increasing backlogs and new contracts.
Since then, though, McDermott has struggled. In the company's most recent quarter, earnings per share fell 20%, missing analysts' expectations despite a significant rise in revenue. Just as falling oil prices have pushed stocks of oil producers ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) down from their summer highs, they've also raised concerns for McDermott, which relies on strength in the energy industry to finance the projects it performs for oil companies. A recent bounce for oil helped push shares up, but McDermott's future depends on having those gains hold.
With better revenue growth over the past year than Foster Wheeler and Shaw Group (NYSE: SHAW ) , McDermott is arguably in a stronger position than some of its rivals. But to reach perfection, McDermott needs the boom times in energy to continue well into the future. If that happens, then the sky's the limit for the stock.
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.
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