Has Noble 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 Noble Corp. (NYSE: NE  ) 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 Noble Corp.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.5% Fail
  1-Year Revenue Growth > 12% (4.2%) Fail
Margins Gross Margin > 35% 41.6% Pass
  Net Margin > 15% 14.2% Fail
Balance Sheet Debt to Equity < 50% 50.3% Fail
  Current Ratio > 1.3 1.28 Fail
Opportunities Return on Equity > 15% 4.7% Fail
Valuation Normalized P/E < 20 38.81 Fail
Dividends Current Yield > 2% 1.4% Fail
  5-Year Dividend Growth > 10% 47.4% Pass
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Noble Corp. last year, the stock has suffered a big drop in its score, losing four points. With sales growth stopping in its tracks, weakening margins, a higher debt-to-equity ratio, and a richer multiple, Noble needs to act now to get things moving back in the right direction.

Noble took a big hit a couple of years ago when drilling in the Gulf of Mexico came to a halt following the Gulf oil spill. But now, activity in the Gulf is getting back to normal, which should be a positive for the company.

One big element of Noble's long-term strategy has been getting into the ultra-deepwater drillship niche. That's been a smart move lately, as shallow-water specialist Hercules Offshore (Nasdaq: HERO  ) has posted losses and missed out on the more profitable deeper waters.

Yet the deepwater niche may be getting crowded. SeaDrill (NYSE: SDRL  ) continues to add new ultra-deepwater rigs to its already impressive arsenal. DryShips (Nasdaq: DRYS  ) completed a spin-off of its Ocean Rig (Nasdaq: ORIG  ) subsidiary, which took on four new drillships last year and appears poised to continue to grow now that it trades independently from its dry-bulk parent.

In its most recent quarterly report, the company cited "unacceptable levels of non-productive time" for its lagging sales and higher costs. As its fleet gets bigger, it'll become a greater challenge for Noble to keep its operations working to capacity.

For Noble to move back toward perfection, it needs to get its financial house in order. If energy prices stay high, then fixing some internal inefficiencies and continuing to build up its resources should get Noble looking up again.

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.

If you like energy stocks, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.

Click here to add Noble 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 in this article. Motley Fool newsletter services have recommended buying shares of SeaDrill. 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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  • Report this Comment On March 21, 2012, at 2:39 PM, TrojanFan wrote:

    First of all, a critical review of these screening criteria shows that 3 of the failing marks are practically within rounding errors of passing (net margins, current ratio and debt to equity ratio).

    Second, these are all backward looking ratios which is problematic. For this screen to be more useful, it would be helpful if you were dealing with what the *next* 12 months is likely to look like rather then the last 12, but that would require an in depth understanding of the company and a lot of hard work. I can tell you that a lot of drillships that they took on all the debt to build are about to come into service starting this quarter and at pretty impressive day rates at that. This will have a very favorable impact on earnings on a go forward basis.

    Third, this is a *very* cyclical business and you are taking your measurement very close to a cyclical trough. Day rates are expanding impressively right now and earnings are expected to start climbing rapidly as the slack capacity in the industry starts to get taken up with higher oil prices. Last year EPS was $1.31, this year's consensus estimate for EPS is $2.94 and next year's is $4.21 which would be well under a 10 P/E. This isn't a consumer staples type of business with a really stable earnings stream. The range of earnings over the business cycle is extremely wide for businesses like this. Now I should also state that there is a wide range of uncertainty around the forecast results. The range of analysts' estimates is very wide for this company and that's for very good reason. There is considerable uncertainty surrounding the future price of oil and the economic growth in Europe, Japan and China which are big marginal drivers for the price of oil as well as the geopolitical turmoil in the Middle East.

    All that said, I feel very comfortable with this investment and I have a medium sized investment in the company (medium by my standards anyways, perhaps small for some). The world is running out of cheap and inexpensive to extract oil whether we like it or not and even a European recession won't change that reality, though it may prolong the affordability and availability of current supplies just a little bit. Like it or not, prices are likely heading higher and that will support extraction from the remote and technologically challenging deap sea areas in which Noble and others specialize.

    Another thing your analysis misses is just how incredibly cheap the cost of capital is on that 50.3% debt to equity is and how impressive this firm's discipline at deleveraging their balance sheet has been during past business cycle peaks. My impression of this management team is very, very good in that regard. They don't overbuild to demand as I've seen so many others in this sector do in the past, though I won't name any names here.

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