Has Frontline 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 Frontline (NYSE: FRO  ) 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 Frontline.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(13.3%)

Fail

 

1-Year Revenue Growth > 12%

(24.9%)

Fail

Margins

Gross Margin > 35%

33.1%

Fail

 

Net Margin > 15%

(75.3%)

Fail

Balance Sheet

Debt to Equity < 50%

752.0%

Fail

 

Current Ratio > 1.3

2.28

Pass

Opportunities

Return on Equity > 15%

(114.5%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Frontline last year, the company has lost another point, bringing its total drop since 2010 to three points as its gross margin fell below 35%. The already beaten-down shares have lost another 20% over the past year.

The bad news for the shipping industry just never seems to stop, as a glut in both tankers and drybulk ships have hurt companies in both segments of the industry, as DryShips (Nasdaq: DRYS  ) has lost nearly two-thirds of its value in the past two years. For oil transportation, the problem comes from extremely low day-rates for very large crude carrier vessels, which have fallen 70% from their 2010 levels and more than 5% so far this year. With even more ships becoming available next year, rates could plunge even further.

Although fellow tanker companies Nordic American Tankers (NYSE: NAT  ) , Teekay Tankers (NYSE: TNK  ) , and Overseas Shipholding Group (NYSE: OSG  ) all have debt on their books to at least some extent, Frontline has had serious liquidity issues. The company will need to come up with some innovative ways to keep its financing in place in order to remain operating.

Unfortunately, the result has been bad for income investors. Just last week, Frontline plunged as it said that it would not pay a dividend for the quarter. With much bigger losses than analysts had expected, things have never looked worse for Frontline.

For Frontline to improve, it really needs some improvement in conditions throughout the shipping market. With that unlikely to happen, Frontline will likely struggle to survive, let alone get any 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.

Frontline may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular 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 Frontline 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.


Read/Post Comments (3) | Recommend This Article (1)

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 10, 2012, at 2:41 PM, snan wrote:

    Why would do an anlysis on a stock in an industry that is in distress. Every company in this industry is in a similar situation. Specific to Frontline, you might have added that it is controlled by an individual with extraordinary resources and that person has the ability to support his assets through this problem. You mention nothing of this and your analysis is therfore very poor.

  • Report this Comment On October 12, 2012, at 10:41 AM, justinmaxwell86 wrote:

    id say the analysis is great. You just added some useful input as well. Mr. Fredriksen is an accounting wizard, i wouldn't count FRO out, unless he vocally dismisses FRO. Would any1 be able to clarify what frontline 2012 was created to do? From what i heard FRO sent the 2012 company the newer of their vessels, along with some of the debt, so that FRO could weather the current down turn in the maritime business.

  • Report this Comment On October 12, 2012, at 3:47 PM, TMFGalagan wrote:

    @snan - Analyzing companies facing big problems can often be the perfect time to look at them, before they recover and the stock price soars.

    best,

    dan (TMF Galagan)

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