Has Southern Copper 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 Southern Copper (NYSE: SCCO  ) 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 Southern Copper.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

0.8%

Fail

 

1-year revenue growth > 12%

0.6%

Fail

Margins

Gross margin > 35%

59.4%

Pass

 

Net margin > 15%

29%

Pass

Balance sheet

Debt to equity < 50%

41.5%

Pass

 

Current ratio > 1.3

4.79

Pass

Opportunities

Return on equity > 15%

36.3%

Pass

Valuation

Normalized P/E < 20

15.25

Pass

Dividends

Current yield > 2%

9.7%

Pass

 

5-year dividend growth > 10%

10.3%

Pass

       
 

Total score

 

8 out of 10

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

Since we looked at Southern Copper last year, it has picked up a point for the second year in a row. Revenue growth has slowed, but a big dividend and progress toward paying down debt earned the score bump. Moreover, the shares have risen nearly 30% over the past year.

Southern Copper has the largest copper reserves in the world, even beating out industry giant Freeport-McMoRan Copper & Gold (NYSE: FCX  ) . The miner has managed to put up strong performance in 2012, thanks largely to extremely low net cash costs of about $0.65 per pound and resulting high profit margins.

What's particularly impressive about Southern Copper's performance is that it comes in the face of weakness among commodity markets in general. Yet copper has managed to hold up better than base metals like iron ore, molybdenum, and zinc, helping diversified miner Teck Resources (NYSE: TCK  ) keep its earnings up.

Increasing investor interest in Southern Copper may continue to push shares higher. When Freeport announced a deal to buy McMoRan Exploration (NYSE: MMR  ) and Plains Exploration & Production (NYSE: PXP  ) , it took away Freeport's status as a pure-play copper producer. Southern Copper doesn't exclusively mine copper, but it's enough of a copper player to represent a reasonable substitute for investors frustrated with the Freeport deal and its associated concerns of conflicts of interest.

For Southern Copper to improve, revenue growth that would result from a full-fledged global economic boom would likely be enough to earn its last couple of points. Perfection might not be too far away for the company if the economy cooperates.

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.

To understand Southern Copper's new opportunity, it's essential to understand rival Freeport-McMoRan and its blockbuster deal to expand into the oil and natural gas industry. Our premium research report elaborates on the deal, with guidance on whether its foray into a new industry will succeed or fail. To find out if Freeport-McMoRan is a buy or a sell, simply click here now to check out the report.

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


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