Has McDermott International 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 McDermott International (NYSE: MDR  ) 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 McDermott International.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (8.6%) Fail
  1-Year Revenue Growth > 12% 9.7% Fail
Margins Gross Margin > 35% 12.9% Fail
  Net Margin > 15% 3.5% Fail
Balance Sheet Debt to Equity < 50% 6.0% Pass
  Current Ratio > 1.3 1.56 Pass
Opportunities Return on Equity > 15% 7.9% Fail
Valuation Normalized P/E < 20 19.56 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

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

Since we looked at McDermott International last year, the company hasn't improved on its three-point score. Shareholders haven't seen much progress either, as the stock eked out only a minimal gain over the past year.

The boom in deepwater drilling has vaulted a number of energy-related companies to the forefront of the energy industry. Seadrill (NYSE: SDRL  ) has benefited greatly from its specialization in ultra-deepwater drilling, while Transocean (NYSE: RIG  ) and Noble have also used their diversified resources to profit from the interest in the deep water.

But McDermott plays a vital role in offshore energy exploration. With its construction and engineering expertise, McDermott faces the challenge of ensuring that undersea energy production is safe despite incredibly difficult conditions. As we all know from Halliburton's (NYSE: HAL  ) experience with the Macondo well that resulted in the Gulf oil spill, any mistakes can have huge consequences.

Although McDermott specialized in shallow water for a long time, it clearly knows where to find the big profits these days. It has plenty of competition from fellow engineers Foster Wheeler (Nasdaq: FWLT  ) and Fluor, but McDermott's multibillion-dollar backlog of projects means that it won't have any lack of business for the foreseeable future.

For McDermott to improve, it needs to keep focusing on higher-margin projects and develop even greater expertise on deepwater projects. Doing so should help it focus on the most lucrative segments and push its score higher over the years to come.

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.

McDermott International has plenty of potential, but why not invest in the one company in the energy sector that can hold fast no matter what oil costs? Find out why this company is "The Only Energy Stock You'll Ever Need" in the Motley Fool's popular free report. Click here for the inside scoop while it lasts.

Click here to add McDermott International 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. The Motley Fool owns shares of Seadrill, Fluor, and Transocean. Motley Fool newsletter services have recommended buying shares of Halliburton and 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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2012, at 4:10 AM, ttbccrn wrote:

    Thanks for the article, can you please have a link to the web site you use to screen for these types of stocks T

  • Report this Comment On October 05, 2012, at 8:15 AM, TMFGalagan wrote:

    @ttbccrn - My figures come from S&P Capital IQ, a subscription service. You can check them out at www.capitaliq.com.

    best,

    dan (TMF Galagan)

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