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Is Peabody Energy the Perfect Stock?

Dan Caplinger
July 27, 2011

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 Peabody Energy (NYSE: BTU  ) 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 Peabody Energy.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 7.9% Fail
  1-Year Revenue Growth > 12% 16.2% Pass
Margins Gross Margin > 35% 29.8% Fail
  Net Margin > 15% 12% Fail
Balance Sheet Debt to Equity < 50% 47.9% Pass
  Current Ratio > 1.3 2.09 Pass
Opportunities Return on Equity > 15% 20.1% Pass
Valuation Normalized P/E < 20 20.25 Fail
Dividends Current Yield > 2% 0.6% Fail
  5-Year Dividend Growth > 10% 8.6% Fail
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of only 4, Peabody Energy isn't burning up the road with its financials. But the coal company is doing everything it can to capitalize on the strength of the global commodities markets, and so far, it's done a good job of holding its own against its competitors.

Two big uses for coal include energy generation and steelmaking, and Peabody is a player in both arenas. Last year, the company's CEO said that "the global coal industry is in the early stages of a long-term supercycle, led by China and India." True to its vision, the company has grown its reach in Asia, working with competitor BHP Billiton (NYSE: BHP  ) to expand an important port in Australia and luring Diana Shipping (NYSE: DSX