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Margins matter. The more Halcon Resources (Nasdaq: HK  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Halcon Resources's competitive position could be.

Here's the current margin snapshot for Halcon Resources over the trailing 12 months: Gross margin is 63.5%, while operating margin is 38.1% and net margin is 6.2%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Halcon Resources has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Halcon Resources over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 73.5% and averaged 66.1%. Operating margin peaked at 33.7% and averaged -17.5%. Net margin peaked at 7.4% and averaged -24.5%.
  • TTM gross margin is 63.5%, 260 basis points worse than the five-year average. TTM operating margin is 38.1%, 5,560 basis points better than the five-year average. TTM net margin is 6.2%, 3,070 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Halcon Resources looks like it is doing fine.

Over the decades, small-cap stocks like Halcon Resources have provided market-beating returns, provided they're value priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (2)

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 February 24, 2012, at 10:20 AM, Teacherman1 wrote:

    I am confused. Which Halcon are you analyzing?

    The old Halcon Resources, Ram Resources, or the new Ram Resources, renamed Halcon Resources?

  • Report this Comment On February 24, 2012, at 12:36 PM, kwt306 wrote:

    If you were completing a valuation project in a college Finance class, I would give you high marks for your analysis - based strictly on your understanding of finance. the real world you have failed. Halcon (formerly Ram Energy) as a new company does not have a 5 year track record. Everything you cite belongs to the old Ram, which was in bad shape, which is exactly why Floyd Wilson and his team were able to buy Ram very cheaply and inject large amounts of cash and thereby drastically improving the company's capital structure and debt covering ratios. They now have lots of cash to go spend on promising plays and/or to buy smaller companies. If you want to give a good analysis of Halcon, then present analysis of the Petrohawk because that's what Halcon is - Petrohawk II.

  • Report this Comment On March 02, 2012, at 12:03 PM, Blindnomore wrote:

    Can't believe there was no mention at all of what just occured to this company. Huge takeover buyout by one of the best oil and gas man in the business when it comes to running one of these companies. He has had major success with both takeovers and startups in this field. Investors really couldn't ask for a better buyer to have come in. With the new board and company CEO and CFO who have worked together on all their successes at the helm, Halkon will soar and then a mega player like XTO or Chesapeak will come in and buy this one from them. The numbers in this article shouldn't really be relied on because this switch to new management has come after a very long long drawn out offering by the former owner. He had been trying to sell this company for several years with several other buyers and offers always getting cancelled for some reason or other. Then the new guy now in charge comes in and sets up the deal and closes it just like all his other managings before. He sees an opportunity and takes actions to bring about what needs to occur to make the opportunity become profitable.

    I hate Motley Fools continual lies in their advertising links. "Get instant access to this or that report". Nope, sorry, not instant unless you let us spam you to death and sell your email address to every other rag picker service on the net. Same as the rest. It's al about the money that isn't even worth a dime when you understand how much of it is in circulation plus that it is backed by nothing but you and me and our labor as a collateral to the countries debt. Guess what? You are enslaved for life to pay someone else's debt. That someone else is every public official and servant who are always wanting more funding for more crap not needed but gladly taken or stolen.

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Halcon Resources CAPS Rating: **