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Is Hercules Offshore the Perfect Stock?

By Dan Caplinger - Updated Apr 6, 2017 at 8:29PM

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Finding companies that have all the right stuff can produce winners.

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 Hercules Offshore (Nasdaq: HERO) 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 Hercules Offshore.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 29.7% Pass
  1-Year Revenue Growth > 12% 0.4% Fail
Margins Gross Margin > 35% 37.7% Pass
  Net Margin > 15% (19.7%) Fail
Balance Sheet Debt to Equity < 50% 102.5% Fail
  Current Ratio > 1.3 1.97 Pass
Opportunities Return on Equity > 15% (14.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   3 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.

Hercules Offshore only manages to dig up a score of three points. The driller has faced some challenging times in the industry, but with things perhaps getting back to some semblance of normality, Hercules might be in a position to benefit from high oil prices and steady demand.

Hercules is a Houston company that provides oil and gas drilling services. It's a big player in the Gulf of Mexico, and the company has grown extremely rapidly since it was founded in 2004. But two things -- the financial crisis and the Gulf oil spill -- put a crimp in Hercules' growth in recent years. The company saw revenue drop more than 40% between 2008 and 2010.

To recover, Hercules is making moves that run counter to what most of its industry competitors are doing. Seadrill (NYSE: SDRL), Transocean (NYSE: RIG), and DryShips (Nasdaq: DRYS) have jumped into the deep end by building ultra-deepwater rigs. Those moves have been very profitable for those companies. By contrast, Hercules is doubling down on the Gulf, adding 20 jack-up rigs to its Gulf presence and thereby accounting for more than half of the region's shallow-water rigs.

As if economic troubles weren't bad enough, Hercules has also run into some legal problems. In April, the company announced that the SEC was investigating it for possible violations of the Foreign Corrupt Practices Act. Similar allegations against other companies last year led to fines of $56.2 million from Pride International, recently bought by Ensco (NYSE: ESV), and $8.2 million from Noble (NYSE: NE). Given that Hercules is currently losing money, fines would be the last thing the company needs.

With oil still near the $100-per-barrel level, drillers have macroeconomic factors in their favor. But until Hercules can dig itself out of its hole, it won't become a perfect 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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Hercules Offshore, Inc. Stock Quote
Hercules Offshore, Inc.
HERO.DL
DryShips Inc. Stock Quote
DryShips Inc.
DRYS
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$2.83 (-3.25%) $0.10
Noble Corporation plc Stock Quote
Noble Corporation plc
NEBLQ
SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Valaris plc Stock Quote
Valaris plc
VAL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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