Has Pengrowth Energy 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 Pengrowth Energy (NYSE: PGH  ) 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 Pengrowth Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(1.9%)

Fail

 

1-Year Revenue Growth > 12%

1.8%

Fail

Margins

Gross Margin > 35%

61.8%

Pass

 

Net Margin > 15%

2.0%

Fail

Balance Sheet

Debt to Equity < 50%

41.9%

Pass

 

Current Ratio > 1.3

0.54

Fail

Opportunities

Return on Equity > 15%

0.6%

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

7.6%

Pass

 

5-Year Dividend Growth > 10%

(22.5%)

Fail

       
 

Total Score

 

3 out of 10

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

Since we looked at Pengrowth Energy last year, the company hasn't been able to recover any of the points it lost from 2010 to 2011. The stock has also gotten hit hard, losing a third of its value over the past year.

As a former Canadian royalty trust, Pengrowth has seen its share of change in the industry in recent years. When the announcement first came out that it would lose its royalty trust status along with Precision Drilling (NYSE: PDS  ) , Baytex Energy (NYSE: BTE  ) , and other peers, Pengrowth temporarily tumbled. More importantly, the bust in commodities during the 2008 market meltdown sent shares plunging.

Since early 2009, stocks in the industry have stabilized significantly. But in July, Pengrowth cut its dividend sharply, reducing its monthly payout from around $0.07 to the $0.04 range. That's consistent with what we've seen from similar companies, as Enerplus (NYSE: ERF  ) made its own dividend cut in the same time period. Fool contributor Rich Smith raised speculation that Penn West Petroleum (NYSE: PWE  ) might need to follow suit with a dividend cut of its own, although that hasn't happened yet.

Looking forward, the key for Pengrowth may result from its steam-assisted gravity drainage technology, which it's using at its Lindbergh site in east-central Alberta. By injecting steam into wells using a specially engineered system, the company hopes to improve production and recovery factors compared to alternative methods, such as the cyclic steam process.

For Pengrowth to improve, it needs Lindbergh to go well. If it can succeed on that big project, its losses from the past several years could disappear quickly, leaving Pengrowth in a much better position to move toward perfection in the future.

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.

Pengrowth Energy 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 Pengrowth Energy 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 Precision Drilling Trust. 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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