Has Transocean 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 Transocean (NYSE: RIG  ) 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 Transocean.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 20.9% Pass
  1-Year Revenue Growth > 12% (11.1%) Fail
Margins Gross Margin > 35% 35.8% Pass
  Net Margin > 15% (4.5%) Fail
Balance Sheet Debt to Equity < 50% 53.2% Fail
  Current Ratio > 1.3 1.54 Pass
Opportunities Return on Equity > 15% (2.4%) Fail
Valuation Normalized P/E < 20 28.36 Fail
Dividends Current Yield > 2% 7.3% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Transocean started paying a dividend in May 2011. Total score = number of passes.

Since we looked at Transocean last year, the oil services company has lost a point. A huge drop in net margins weighed on the stock, although its new dividend gained back one of its lost points.

The defining moment for Transocean over the past two years has been the Gulf oil spill. With BP (NYSE: BP  ) seeking recoveries from Transocean and Halliburton (NYSE: HAL  ) to help reimburse it for the huge costs it has paid to clean up the spill, Transocean's financial future still has an ominous cloud hanging over it.

More troubling, however, has been Transocean's performance compared to its competitors. In its most recent quarter, Transocean cited new regulations as the reason for its posting a loss. However, SeaDrill (NYSE: SDRL  ) , which is famous for its fleet of ultra-deepwater rigs, saw sales rise 3% and operating profit jump almost 12%. In addition, DryShips (Nasdaq: DRYS  ) spinoff Ocean Rig has ramped up construction of new rigs and appears poised to be an even larger threat to Transocean.

For Transocean to thrive again, it needs to put the BP incident behind it. With plenty of opportunities around the world for oil drilling, Transocean should be able to recover and get a whole lot closer to perfection.

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.

Despite its promise, Transocean is an uncertain prospect for investors right now. If you'd rather jump into the biggest potential gainers in energy, learn more about three other stocks that will prosper from $100 oil in the Motley Fool's latest special free report on energy. It's yours free, but only for a limited time, so take a look today.

Click here to add Transocean 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 Transocean. 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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