Is CONSOL 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 CONSOL Energy (NYSE: CNX  ) 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 CONSOL Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.8% Fail
  1-Year Revenue Growth > 12% 16.0% Pass
Margins Gross Margin > 35% 36.6% Pass
  Net Margin > 15% 10.6% Fail
Balance Sheet Debt to Equity < 50% 88.6% Fail
  Current Ratio > 1.3 1.37 Pass
Opportunities Return on Equity > 15% 19.3% Pass
Valuation Normalized P/E < 20 16.03 Pass
Dividends Current Yield > 2% 1.5% Fail
  5-Year Dividend Growth > 10% 8.7% Fail
       
  Total Score   5 out of 10

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

With five points, CONSOL Energy finishes in the middle of the pack. But the coal company shares the challenges that its industry peers face from the current environment for coal and natural gas.

A huge shift is occurring in the utility industry, and it has huge implications for coal miners. With natural gas prices near decade lows, utilities are shifting away from coal toward cleaner-burning gas. American Electric Power (NYSE: AEP  ) , which is the biggest coal-user in the U.S., expects its demand to fall 17 million tons by 2015. That's been bad news for Peabody Energy (NYSE: BTU  ) , Arch Coal (NYSE: ACI  ) , and to a lesser extent CONSOL, as tighter emissions standards and changes in proposed power-plant projects bode ill for the future of coal use for power generation.

But over the years, CONSOL has thrived from the huge overseas demand for metallurgical coal, as it becomes an increasingly important component of its overall business. CONSOL is the leading U.S. coal exporter, and China and India's appetite for coal has seemed boundless in past years. Yet even as CONSOL and Patriot Coal (NYSE: PCX  ) were able to justify sending met coal clear across the U.S. and the Pacific Ocean to Asian markets, signs of emerging-market weakness have thrown a wrench into growth projections there as well.

For CONSOL to move up from here, it needs to see a turnaround in China's growth prospects. But even if the global economy picks back up, CONSOL will suffer from the headwinds associated with low natural gas prices well into the future.

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.

CONSOL Energy has its challenges, but if you like energy stocks, we've got another 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 CONSOL Energy 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. 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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