Has Precision Drilling 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 and then decide whether Precision Drilling (NYSE: PDS  ) 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.
  • Moneymaking 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 Precision Drilling.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

14%

Fail

 

1-Year Revenue Growth > 12%

16.4%

Pass

Margins

Gross Margin > 35%

40.9%

Pass

 

Net Margin > 15%

9.4%

Fail

Balance Sheet

Debt to Equity < 50%

52.6%

Fail

 

Current Ratio > 1.3

1.78

Pass

Opportunities

Return on Equity > 15%

8.9%

Fail

Valuation

Normalized P/E < 20

13.28

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at Precision Drilling last year, the company has kept the point it gained from 2010 to 2011. But shareholders aren't celebrating, as the stock has lost a third of its value over the past year.

As Canada's largest oil and gas driller, Precision Drilling seeks to profit from drilling activity more than the actual production that result from the activity. Yet because of the company's former status as a Canadian royalty trust, Precision tends to get lumped in with Enerplus (NYSE: ERF  ) , Penn West Petroleum (NYSE: PWE  ) , and Pengrowth Energy (NYSE: PGH  ) , all of which are fellow former Canroys but have more of a focus on production. Yet in some ways, Precision Drilling got hit even harder, as all three of its peers pay substantial dividends while Precision Drilling has had to eliminate its payout.

But Precision has some things going for it. Unlike some small energy companies, Precision has long-maturity debt, with no refinancing necessary until 2019. Even with a substantial debt load, that gives Precision flexibility that companies with nearer-term maturities lack.

Moreover, many mistakenly assume that low natural gas prices are automatically bad for Precision. But both Patterson-UTI Energy (Nasdaq: PTEN  ) and Precision have seen sustained demand for horizontal drilling, as interest in natural-gas liquids and oil continues to drive drilling activity.

In its most recent quarter, though, Precision saw some changes in that trend, as growth in the Bakken play slowed down and drilling activity fell both for dry gas and gas liquids. With exploration companies pulling back on capital spending, Precision is going through a typical cyclical down period.

For Precision to recover, higher natural gas prices would go a long way toward shoring up the prospects for the companies that use its drilling rigs. Once that happens, Precision could push a lot higher toward perfection in short order.

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.

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Click here to add Precision Drilling 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. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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