Is Heckmann 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 Heckmann (NYSE: HEK  ) 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 Heckmann.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 145.2%* Pass
  1-Year Revenue Growth > 12% 679.4% Pass
Margins Gross Margin > 35% 18.5% Fail
  Net Margin > 15% (14.1%) Fail
Balance Sheet Debt to Equity < 50% 35.8% Pass
  Current Ratio > 1.3 3.58 Pass
Opportunities Return on Equity > 15% (1%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. *3.25-year growth rate.

With only four points, Heckmann has plenty of improvement to make. But the young energy services company has gotten off to a fast start in a hot industry.

Unconventional energy plays like shale gas have become huge drivers in the oil and gas industry. But the hydraulic part of hydraulic fracturing means you need water, and that's what Heckmann aims to provide. That may seem like a trivial business, but with various regulations involved, there's more to Heckmann's business than just delivering water -- it also has trucks, pipelines, and disposal sites to handle the process correctly.

But the plunge in natural gas prices has hurt Heckmann's results recently. In its most recent quarter, Heckmann lost $2.5 million, as an overall slowdown in drilling centered particularly on the Haynesville Shale hurt the company's results despite a nearly 400% jump in revenue during the quarter. With competitor Cameron International (NYSE: CAM  ) having the dominant share of the oil-field water-services business, Heckmann has its hands full looking to distinguish itself from the crowd.

One way that Heckmann is standing out from the crowd is by furthering liquefied natural gas through its own fleet of trucks. Enlisting Encana (NYSE: ECA  ) to provide LNG fueling stations in its territory, Heckmann bought 200 trucks from PACCAR's (Nasdaq: PCAR  ) Peterbilt division. Equipped with technology from natural-gas engine specialist Westport Innovations (Nasdaq: WPRT  ) , the fleet should pay for the extra costs involved within two years.

For Heckmann to keep pushing forward, it needs to get itself profitable. Improving natural gas prices may eventually do that, but if Heckmann can do its part through smart growth and cost management, then it could move much closer to perfection in 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.

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 Heckmann 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. The Motley Fool owns shares of Westport Innovations and Heckmann. Motley Fool newsletter services have recommended buying shares of PACCAR and Westport Innovations. 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.


Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On May 04, 2012, at 11:52 AM, Teacherman1 wrote:

    It may take another quarter or two, but when we start seeing the results of the Thermo Fluids acquisition and things get a bit clearer, I expect there will be a significant change in the "pass/fail ration" you laid out so nicely.

    They are just going through "growing pains".

    This is a nice price for investors who want to get ahead of the curve.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On May 04, 2012, at 11:54 AM, Teacherman1 wrote:

    OOPs, Dyslexia kick in. "pass/fail ratio"

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