Has Ultra Petroleum 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 Ultra Petroleum (NYSE: UPL  ) 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 Ultra Petroleum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

11.2%

Fail

 

1-Year Revenue Growth > 12%

(10.0%)

Fail

Margins

Gross Margin > 35%

71.0%

Pass

 

Net Margin > 15%

(85.6%)

Fail

Balance Sheet

Debt to Equity < 50%

433.3%

Fail

 

Current Ratio > 1.3

0.47

Fail

Opportunities

Return on Equity > 15%

(91.0%)

Fail

Valuation

Normalized P/E < 20

11.24*

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes. * Normalized earnings excludes impact of $1.87 billion in ceiling-test and asset impairment writedowns before taxes.

Since we looked at Ultra Petroleum last year, the company has seen its score drop by three points, as falling revenue and plunging profitability due to falling natural gas prices hurt its metrics. The stock also suffered, losing about 20% of its value over the past year.

Ultra Petroleum is a leader in the natural gas production industry. Its key competitive advantage comes from its cheap cost structure, which helped it stay profitable a lot longer than most of its rivals. Low prices have pushed giants Chesapeake Energy (NYSE: CHK  ) and SandRidge Energy (NYSE: SD  ) away from dry natural gas toward oil and natural gas liquids, and as more producers move in that direction, falling supplies of dry gas should help prices recover.

Yet natural gas prices fell even further this year than many investors expected, falling briefly into the $1.50-$2.00 range before rebounding recently. That sent the United States Natural Gas ETF (NYSEMKT: UNG  ) to brand-new all-time lows back during the spring. Prices were low enough to cause problems even at Ultra and fellow low-cost producer Range Resources (NYSE: RRC  ) , although Range's extensive liquids exposure helped shelter its profits somewhat.

In its most recent quarter, Ultra's shares fell 10% after low natural gas prices forced the company to take what's known as a "ceiling test" writedown of $1.1 billion net of taxes. Even without the writedown, adjusted net income was down year-over-year.

For Ultra to improve, it needs the recent jump in gas prices to continue higher. With other players having shifted production out of dry gas, it could take time for them to get back into production even if prices rise, giving Ultra a temporary boost to go along with its longer-term competitive advantage.

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.

Ultra Petroleum 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 Ultra Petroleum to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ultra Petroleum and has options positions on Chesapeake Energy and Ultra Petroleum. Motley Fool newsletter services recommend Range Resources and Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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  • Report this Comment On October 12, 2012, at 7:18 PM, wjcost wrote:

    Why would you ever publish any article like this? It was a perfect waste of my time to read this. Better to be silent than to publish useless trash like this.

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