Has RPC 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 RPC (NYSE: RES  ) 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 RPC.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

24.1%

Pass

 

1-year revenue growth > 12%

18.3%

Pass

Margins

Gross margin > 35%

44.1%

Pass

 

Net margin > 15%

15.0%

Pass

Balance sheet

Debt to equity < 50%

9.2%

Pass

 

Current ratio > 1.3

3.34

Pass

Opportunities

Return on equity > 15%

36.1%

Pass

Valuation

Normalized P/E < 20

9.19

Pass

Dividends

Current yield > 2%

2.5%

Pass

 

5-year dividend growth > 10%

31.6%

Pass

       
 

Total score

 

10 out of 10

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

Since we looked at RPC last year, the company collected its final point, pushing its dividend over the 2% mark. Yet the stock hasn't looked perfect, with roughly a 10% loss over the past year.

RPC is a small oil services company with a big reach. The company operates not only in the U.S. and Canada but around the world, with projects spanning the globe from China and Latin America to New Zealand and Africa.

Yet RPC got 2012 started off on the wrong foot, as natural gas prices plunged. That in turn has had big exploration and production companies Chesapeake Energy (NYSE: CHK  ) and SandRidge Energy (NYSE: SD  ) shift their focus away from dry gas toward gas liquids and oil production. For service companies like Carbo Ceramics and RPC, that move can cause revenue to drop but improves margins, and that's exactly what we've seen throughout the year. Ever since missing earnings estimates badly in the fourth quarter of 2011, RPC has come through with three straight bottom-line beats.

One area where RPC stands out from its peers is in its healthy dividend payouts, which got a recent boost from a $0.20 per share special dividend declared for late last year. Even without that special payout, though, the services company's yield dwarfs even those of industry giants Schlumberger (NYSE: SLB  ) and Halliburton (NYSE: HAL  ) .

To maintain its perfect score, RPC will need to fight headwinds that could depress revenue growth and make sure it keeps its margins up. Otherwise, the company looks like a cheap bargain, and I'll be making a positive CAPScall on the 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.

RPC and its peers have suffered from a slowdown in natural gas exploration, but as this market looks to rebound, investors would be wise to consider stocks like Halliburton. As one of the top companies in the business and one of those most in tune with the domestic market, Halliburton has a lot to offer. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.

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


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