Is Cheniere Energy 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 Cheniere Energy (AMEX: LNG  ) 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 Cheniere Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 161.0% Pass
  1-Year Revenue Growth > 12% (2.8%) Fail
Margins Gross Margin > 35% 73.2% Pass
  Net Margin > 15% (77.4%) Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 0.52 Fail
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 7

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

With only two points, Cheniere Energy doesn't look very energetic. But the company has tapped into what could be a very profitable trend over the long haul.

The boom in natural gas production has left the U.S. with a challenge: what to do with the glut of natural gas? Cheniere and its subsidiary, Cheniere Energy Partners (AMEX: CQP  ) , are at the forefront of a potential solution to that problem: exporting it in the form of liquefied natural gas, or LNG. With Cheniere working to expand its existing Sabine Pass terminal to become a bi-directional facility -- currently it only handles imported LNG -- the company could help boost gas demand and get LNG to places like Asia where it's needed most.

Although the project won't be complete for several years, Cheniere is already putting the pieces in place. Chesapeake Energy (NYSE: CHK  ) has committed to supplying gas for export, while Cheniere has also found a buyer for the LNG. It also entered a contract with Bechtel for engineering and construction services on the project.

Cheniere isn't without competition, though. Apache (NYSE: APA  ) , EOG Resources (NYSE: EOG  ) , and EnCana (NYSE: ECA  ) have put together an LNG export joint venture. But although it's further along with permitting than Cheniere, the joint venture doesn't yet have customers. Royal Dutch Shell (NYSE: RDS-A  ) also expects to build a similar LNG export facility.

Still, with completion a long way off, Cheniere has to make it to the finish line. Earlier this week, Cheniere announced that it had priced a secondary stock offering at $8.35 per share, which was 11% less than the previous day's close. Shares dutifully dropped near to the secondary offering price. Even with the potential dilution, Cheniere will raise a much needed $300 million to pay off short-term loans due early next year. But the company still has a huge debt load to take care of in the coming years.

Cheniere won't reach perfection until its major capital expenditures on the Sabine Pass facility start paying off. But investors looking to get in on the ground floor won't want to wait to get in until Cheniere's score starts rising.

Cheniere will definitely benefit from the current energy boom, but there's another stock that will be the true winner from coming legislation on natural gas. Find out about it right here.

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 Cheniere Energy 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. 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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