Is Phillips 66 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 Phillips 66 (NYSE: PSX  ) 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 Phillips 66.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.7%* Fail
  1-Year Revenue Growth > 12% 1.8%** Fail
Margins Gross Margin > 35% 11.0% Fail
  Net Margin > 15% 2.7% Fail
Balance Sheet Debt to Equity < 50% 42.1% Pass
  Current Ratio > 1.3 1.29 Fail
Opportunities Return on Equity > 15% 25.7% Pass
Valuation Normalized P/E < 20 7.17 Pass
Dividends Current Yield > 2% 1.9% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful; Phillips 66 paid its first dividend in July 2012. Total score = number of passes. *3.5-year growth rate. **Annualized growth between 2011 Q3 and 2012 Q2.

Phillips 66 posts a mediocre score of three points. But the stock has come out of the gate strongly since its IPO, climbing more than 20% from its first-day closing price.

Phillips 66 holds the refinery and other downstream assets that ConocoPhillips (NYSE: COP  ) used to own before it spun them off. The result was to leave ConocoPhillips as a focused exploration and production company, a strategy that served Marathon Oil (NYSE: MRO  ) well when it split itself off from refinery company Marathon Petroleum (NYSE: MPC  ) .

In many ways, Phillips 66 couldn't have picked a better time to come onto the market. Oil prices have fallen significantly in recent months, yet prices of gasoline and other refined products remain stubbornly high. That may not be ideal for consumers, but it's added to profits for players across the industry, especially Valero (NYSE: VLO  ) , which has jumped to new yearly highs.

The big challenge for Phillips 66, however, comes from its narrow margins. Even with favorable crack spreads, the company doesn't have a huge margin of safety in remaining profitable. As competition remains fierce in the industry, margin expansion doesn't seem hugely likely.

For Phillips 66 to improve, it needs to get its dividend up in line with its peers and then work hard at trying to capture more market share. That'll be an uphill battle, but Phillips 66 has more room to make shareholders happy if it can get at least a little closer to perfection in the years ahead.

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, you may want other options beyond Phillips 66. We've got another stock you should also look at more closely. 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 Phillips 66 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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