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Has Stillwater Mining Become the Perfect Stock?

Sunday - 2/3/2013, 8:33pm  ET

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 and then decide whether Stillwater Mining 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.
  • Moneymaking 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 Stillwater Mining.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.8%

Fail

 

1-year revenue growth > 12%

8.3%

Fail

Margins

Gross margin > 35%

21.5%

Fail

 

Net margin > 15%

6.8%

Fail

Balance sheet

Debt to equity < 50%

20.7%

Pass

 

Current ratio > 1.3

1.83

Pass

Opportunities

Return on equity > 15%

6.8%

Fail

Valuation

Normalized P/E < 20

41.45

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

2 out of 10

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

Since we looked at Stillwater Mining last year, the company has seen its score plunge by 4 points, giving up every single point it gained from 2011 to 2012. Falling margins, returns on equity, and earnings were to blame for the decline, and the shares have barely been able to break even over the past year.

Stillwater Mining has long been a favorite among mining stocks for its unusual exposure to platinum and palladium production. North American Palladium is the only other miner of platinum-group metals in North America, and it has had some issues related to its Lac des Iles mine that have prevented it from reaching its full production potential.

The big driver of Stillwater's results is how strong demand for its metals are, and that in turn relies largely on the health of the auto industry, which uses platinum and palladium in catalytic converters. Yet Ford recently issued a dour forecast for further massive losses in its operations in Europe, and even with relatively strong results domestically, a European recession could spell trouble for Stillwater. General Motors has seen similar trends and has faced resistance from labor groups in Germany who want to avoid wage freezes and factory closures despite big losses in its Opel unit. Add all that up, and you get a scary outlook for auto production generally and platinum-group metal demand specifically.

Stillwater is benefiting, though, from mine shutdowns in South Africa, the other big source for platinum. With Anglo American Platinum saying earlier this month that it will cut output by 400,000 ounces, platinum and palladium prices have soared so far in 2013.

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