Source: Core Laboratories

When you hear the term blue chip stock, what comes to mind? I'm assuming it's the big companies that we hear about every day, like Coca-Cola, ExxonMobil, or Wal-Mart and not an energy company like Core Laboratories (NYSE:CLB).

It may not be a household name, but in many ways Core Labs qualifies as a blue chip stock that should be at the core of your investment portfolio. Let's take a brief look at Core Labs and why it has all the characteristics of a blue chip stock that really matter.

What are blue chip stocks?

Blue chip stocks are well-established companies that are in very fit financial shape, have large market capitalizations, and have been around for a long time. A blue chip stock is typically a market leader and has a reputation for quality, reliability, and profitability in good times and in bad. Blue chip stocks are also typically well-known and pay dividends. 

What could make Core Labs a blue chip stock?

There are two things that might disqualify Core Laboratories as a blue chip stock: It's not even close to being a household name -- in fact, unless you are an energy investing junkie you may never have even heard of it before -- and its market capitalization of under $7 billion makes it a modest sized business compared to other blue chips. If you want to stick to these arbitrary rules for defining a blue chip stock, though, you'll miss out on the other aspects that make this a wonderful business to own.

Core Lab's business is built around one simple idea: Oil companies can't beat the laws of thermodynamics. What this means is that oil reservoirs have certain properties, such as pressure and liquids content, that limit the amount of oil available for extraction. So the company builds products and services that analyze the properties of an oil reservoir to maximize production output and total recoverable resources. This business model is ideal for today's oil market, in which the costs for new sources are climbing, and those who explore for oil want to get it right the first time.

What really separates Core from many of its peers in the oil services, though, is that it can execute on this idea with amazing results. The company has consistently been breaking revenue and earnings records for several years in a row thanks to Core's expanding margins and the increasing number of companies becoming more aware of the need for Core's offerings.

CLB Revenue (Quarterly) Chart

CLB Revenue (Quarterly) data by YCharts

What is even more impressive about Core Labs is its ability to generate a return on investment. With a technology lead in the space and high margins, the company is able to generate gobs of cash -- more than 20% of its revenue, to be precise -- even after research and development expenses. These factors all lead to Core Labs having a return on invested capital more than double its closest peer in the space.

Source: Core Laboratories Investor Presentation

And what does the company do with all that free cash? Return it to shareholders with dividends and share buybacks, of course. Over the past 10 years, Core has bought back close to a quarter of its entire shares outstanding. Investors may not be completely impressed with the company's dividend yield -- at 1.3% today -- but with that much free cash available to management it's pretty easy to see its dividend increasing in the future. 

What a Fool believes

If you are willing to look past the smaller market value and the fact that you probably will never hear Core Labs' name brought up in everyday conversation, then Core Laboratories more than fits the mold of a blue chip stock. The one thing that could cause Core's business to slow from its current pace is if we were to see a significant decline in capital spending from oil producing companies. Considering that demand for oil is expected to rise by 40% between now and 2040, it's hard to see that happening anytime soon.

So if you are looking for that next blue chip stock, Core should be on your list.

Tyler Crowe owns shares of Core Laboratories. You can follow him at under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

The Motley Fool recommends Core Laboratories. The Motley Fool owns shares of Core Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.