Has Mechel 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 Mechel (NYSE: MTL  ) 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 Mechel.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

14.6%

Fail

 

1-year revenue growth > 12%

(5.7%)

Fail

Margins

Gross margin > 35%

30.5%

Fail

 

Net margin > 15%

(3.0%)

Fail

Balance sheet

Debt to equity < 50%

215.3%

Fail

 

Current ratio > 1.3

1.19

Fail

Opportunities

Return on equity > 15%

(6.5%)

Fail

Valuation

Normalized P/E < 20

13.44

Pass

Dividends

Current yield > 2%

4.1%

Pass

 

5-year dividend growth > 10%

(5.4%)

Fail

       
 

Total score

 

2 out of 10

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

Since we looked at Mechel last year, the company has lost four full points as revenue growth and margins fell sharply. Shareholders haven't been happy with the stock either, with its 30% drop over the past year.

Russia's Mechel operates in two big industries that have had major problems recently: steel and coal. In the global steel market, major players ArcelorMittal (NYSE: MT  ) and U.S. Steel (NYSE: X  ) have had to deal with flagging demand due to broad-based economic slowdowns, especially in formerly red-hot emerging market countries like China. Meanwhile, for coal producers, low natural gas prices in the U.S. have spurred utilities and other big users to convert from coal to gas, leaving Peabody Energy (NYSE: BTU  ) and Arch Coal (NYSE: ACI  ) scrambling to find coal buyers even at greatly reduced prices.

Still, with share prices depressed, Mechel stands to gain a lot if a stronger recovery in the economy takes hold. Unfortunately, Mechel can't afford to wait forever, as it has huge amounts of debt and has had to take dramatic action to shore up its finances. Although shareholders celebrated news a few months ago that Mechel might sell a stake in its promising Elga mining complex, asset sales mean less potential profit for investors once conditions in the industry turn.

Earlier this month, Mechel managed to get a $1 billion loan restructured. That will help the company in the short term, but its efforts to raise $4 billion through divestitures haven't yet borne fruit.

For Mechel to improve, it needs to build on the third-quarter profit it posted earlier today and focus on getting its products to areas of the world that are close to its Russian home. If the global economy recovers soon enough, then Mechel could produce amazing results for investors who were willing to buy what looks now like an unattractive stock that's far from perfection.

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.

Mechel has had to deal with the same issues affecting coal as Peabody Energy. For Peabody, though, exports are becoming a much bigger part of its business, with deals in place to get its cheaper coal from the Powder River and Illinois basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is most worthy of your consideration. Don't miss out on this invaluable resource. Simply click here now to claim your copy today.

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


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