Has McMoRan Exploration 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 McMoRan Exploration (NYSE: MMR  ) 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 McMoRan Exploration.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

7.7%

Fail

 

1-year revenue growth > 12%

(22.1%)

Fail

Margins

Gross margin > 35%

60.4%

Pass

 

Net margin > 15%

(18.0%)

Fail

Balance sheet

Debt to equity < 50%

34.9%

Pass

 

Current ratio > 1.3

0.91

Fail

Opportunities

Return on equity > 15%

(3.9%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

2 out of 9

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

Since we looked at McMoRan Exploration last year, the company has seen its score plunge by three points. Falling revenue and a drop in its current ratio account for the decline, and the stock has lost nearly half its value over the past year.

McMoRan is a small oil and gas exploration and production company that focuses on the Gulf Coast as well as offshore drilling in the Gulf of Mexico. By itself, that certainly doesn't distinguish it from many other producers, as Seadrill (NYSE: SDRL  ) and Transocean (NYSE: RIG  ) have conducted plenty of deepwater drilling in the region, while Hercules Offshore (Nasdaq: HERO  ) and others have historically concentrated on shallow-water resources.

What gives McMoRan so much potential, though, is its attempt to drill ultra-deep wells on the continental shelf in the Gulf. In other words, McMoRan doesn't have to deal with the challenges of deep-water drilling, but once it hits the bottom of the Gulf, it's ambitious in pushing around 25,000 feet or more further down in search of major gas pockets.

Last week, McMoRan's delays finally caught up with the stock. After saying that it was only now at the point at which it's injecting solvents into its Davy Jones 1 well in order to prepare for a measurable flow test, McMoran's stock fell sharply as investors finally lost patience with the company. Given that McMoRan was planning such a test this time last year, it's hard to fault investors for finally giving in to disappointment, even though working-interest partner Energy XXI (Nasdaq: EXXI  ) posted less severe losses.

For McMoRan to improve, it needs to move forward with its Davy Jones well. If it's successful, then McMoRan could easily skyrocket in price from here, and get a lot closer to perfection in the process.

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.

McMoRan could revolutionize the drilling industry, but Seadrill has already had big success in drilling in places no one ever went before. Find out whether Seadrill is a buy and learn more about what to expect from the company going forward by checking out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.

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


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