Has Halliburton 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 Halliburton (NYSE: HAL  ) 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 Halliburton.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.9% Fail
  1-Year Revenue Growth > 12% 38.1% Pass
Margins Gross Margin > 35% 20.2% Fail
  Net Margin > 15% 11.4% Fail
Balance Sheet Debt to Equity < 50% 36.5% Pass
  Current Ratio > 1.3 2.81 Pass
Opportunities Return on Equity > 15% 25.5% Pass
Valuation Normalized P/E < 20 10.77 Pass
Dividends Current Yield > 2% 1.1% Fail
  5-Year Dividend Growth > 10% 3.7% Fail
       
  Total Score   5 out of 10

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

Since we looked at Halliburton last year, the oil services company has picked up a point. The stock's weak performance was enough to push its valuation way down, making it look more like a value play.

Halliburton got its name sullied in the Gulf oil spill two years ago due to its connection to the Macondo well. But with most of the liability thus far being borne by BP (NYSE: BP  ) , Halliburton is doing its best to put the episode behind it.

To do so, Halliburton has a unique strategy. One focus area is on unconventional drilling in untapped international markets. For instance, late last year, the company helped Apache (NYSE: APA  ) with its Argentinian operations by completing a multistage hydrofracked horizontally drilled well, the first such completion in the Neuquen region of the country. Operations in Poland and Colombia add to its reach.

Halliburton is also poised to benefit from the ramp-up in deepwater drilling. SeaDrill (NYSE: SDRL  ) and the recently spun-off Ocean Rig subsidiary of DryShips (Nasdaq: DRYS  ) are just two of the players making big inroads into ultra-deepwater drilling. As those companies build up their presence in the industry, it should mean more business for Halliburton.

In the long run, continuing growth in the industry should help produce the sales gains that Halliburton needs to get closer to perfection. But margin growth will be harder to come by. Once Halliburton's legal uncertainties are behind it, a higher dividend could put shareholders' concerns to rest and make the stock look much more attractive.

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 Halliburton 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 29, 2012, at 12:10 PM, ipinsao wrote:

    People keep saying how great HAL is but the stock keeps free falling.

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