Has Occidental 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 Occidental Petroleum (NYSE: OXY  ) 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 Occidental Petroleum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

7.4%

Fail

 

1-Year Revenue Growth > 12%

10.8%

Fail

Margins

Gross Margin > 35%

66.9%

Pass

 

Net Margin > 15%

26.1%

Pass

Balance Sheet

Debt to Equity < 50%

19.3%

Pass

 

Current Ratio > 1.3

1.54

Pass

Opportunities

Return on Equity > 15%

16.9%

Pass

Valuation

Normalized P/E < 20

10.38

Pass

Dividends

Current Yield > 2%

2.6%

Pass

 

5-Year Dividend Growth > 10%

17.8%

Pass

       
 

Total Score

 

8 out of 10

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

Since we looked at Occidental Petroleum last year, the company has gained a point after staying stable between 2010 and 2011. Slowing revenue growth held the oil company's score back, but gains in current ratio and dividend yield pushed it closer to perfection, even though the stock dropped about 5% over the past year.

Occidental Petroleum isn't the first name many people think of in the energy industry, but it's a major player among big oil companies. Occidental has significant operations in the Permian Basin, where it's the largest oil producer among its peers and has had substantial success using enhanced oil recovery techniques to find new life out of oilfields that were once considered played-out. Occidental leads the industry in tertiary oil recovery, beating out even specialist Denbury Resources (NYSE: DNR  ) for the top spot.

But in its home state of California, Occidental faces controversy. A recent lawsuit by Sierra Club, Earthjustice, and other groups against the state's oil and gas agency alleges that the agency has violated the California Environmental Quality Act. Phillips 66 (NYSE: PSX  ) , Valero (NYSE: VLO  ) , and BP (NYSE: BP  ) are all part of a group of companies that along with Occidental made up 80% of California's drilling and used hydraulic fracturing on more than 600 wells collectively last year.

Just yesterday, Occidental announced earnings results for the third quarter. Revenue and net income fell due to lower oil prices, but production rose 3.7% overall and 8% domestically. Moreover, the company had great success from its midstream segment, with earnings more than doubling thanks to higher spreads for refined products.

For Occidental to improve, it needs to focus on finding new growth opportunities. That's the last hurdle Occidental needs to overcome in order to become a perfect stock.

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.

There are many different ways to play the energy sector, and our analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out our special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.

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


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  • Report this Comment On October 26, 2012, at 1:53 PM, topbeancounter wrote:

    You set very high standards. For a mature company, outside of a technology field, to experience revenue growth at those arbitrary numbers, and they are completely arbitrary, would leave no company in your world that is perfect. Not only will I take 8 out of an arbitrary 10, but those other two arbitrary measurements were pretty good as well. Guess I'll hand onto my perfect stock, even though it's not yours.

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