Is McMoRan Exploration 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 McMoRan Exploration (NYSE: MMR  ) 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 McMoRan Exploration.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.8% Pass
  1-Year Revenue Growth > 12% 13.9% Pass
Margins Gross Margin > 35% 62.3% Pass
  Net Margin > 15% (15.9%) Fail
Balance Sheet Debt to Equity < 50% 33.2% Pass
  Current Ratio > 1.3 1.90 Pass
Opportunities Return on Equity > 15% (8.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With a score of five, McMoRan Exploration finds itself in the middle of the pack. The oil and gas explorer has benefited from interest in energy lately, but it hasn't found the perfect path to huge profits just yet.

McMoRan is an exploration and production company that focuses on the Gulf of Mexico, with both offshore and onshore activity. Although it has some shared management with copper-producer Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , the two companies have been largely unrelated since the spinoff that created Freeport in 1994.

This week, shares of McMoRan have moved substantially higher. Although a rise in oil prices has created a broad-based rally for energy companies, Gulf-focused companies including W&T Offshore (NYSE: WTI  ) and Callon Petroleum (NYSE: CPE  ) saw particularly strong moves.

The problem, though, is that unlike most of its Gulf-region peers, including Gulfport Energy (Nasdaq: GPOR  ) and Swift Energy (NYSE: SFY  ) , McMoRan isn't profitable. Moreover, even on an EBITDA basis, its valuation is much higher than its competitors'.

For McMoRan to move closer to perfection, it needs initiatives like its deepwater explorations to bear fruit. If the company can cut its costs of production, it could become profitable even in a poor environment for gas prices -- a step that would move the company forward quickly.

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 McMoRan Exploration 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. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of W&T Offshore. 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 (4)

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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 01, 2011, at 1:02 PM, egobasher wrote:

    Doing more homework before writing the article you would of found that they have cut costs dramatically. Well drilling costs are down $100 million per ultra deep well (below 30,000 feet). They have managed that by using expandable casting and starting with a 13 3/8 hole instead of 24 inch.

    The article should of also of mentioned the Davy Jones #1 flow test coming this month. It is so important to the future of MMR since it will be THE FIRST well do produce below 30,000 feet in the Gulf shelf. Over 200 miles of Gulf waters and not a single well producing below 30,000 feet!

    Hold on to your hats!

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