Has Teekay Tankers 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 Teekay Tankers (NYSE: TNK  ) 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 Teekay Tankers.

Factor

What We Want to See

Actual

Pass or Fail?

Growth Five-year annual revenue growth > 15% (6.2%) Fail
  One-year revenue growth > 12% (11.6%) Fail
Margins Gross margin > 35% 53% Pass
  Net margin > 15% (11%) Fail
Balance Sheet Debt to equity < 50% 57.5% Fail
  Current ratio > 1.3 2.18 Pass
Opportunities Return on equity > 15% (2.2%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 15.8% Pass
  Five-year dividend growth > 10% (30.9%)* Fail
       
  Total Score   3 out of 9

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

Since we looked at Teekay Tankers last year, the company hasn't been able to improve on its three-point score. The shipping stock has lost half its value, and the industry continues to struggle with tough conditions around the world.

Teekay owns a fleet of oil tankers, which it uses to transport energy products across the globe. Tanker shipping has been a dog-eat-dog industry lately, with Nordic American Tankers (NYSE: NAT  ) having built up a big fleet in recent years and other players similarly boosting supply, leading to a glut of shipping capacity. The problem got so bad that Frontline (NYSE: FRO  ) said last year that it would need additional financing just to maintain its operations.

Moreover, looking forward, it's hard to feel optimistic about Teekay. The huge ramp-up in unconventional energy production has reduced the need for imports, throwing another wrench in tanker-shipping demand. Even as Frontline's CEO cited Chinese demand remaining strong, China's economic slowdown poses another challenge to the industry, putting Frontline and Ship Finance International (NYSE: SFL  ) at further risk.

Teekay stands out from rival Overseas Shipholding (NYSE: OSG  ) with its high dividend yield. But the only way Teekay has continued its distributions has been to issue new shares, calling into question its ability to keep paying investors.

For Teekay to improve, it has to wait for better conditions in the shipping market. Unfortunately, it could take years for the industry to work out its oversupply, which could make for lean times for Teekay shareholders for the foreseeable future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Teekay Tankers isn't the perfect stock, but we have some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Teekay Tankers 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. 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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