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Has BP Become the Perfect Stock?

Friday - 4/5/2013, 4:07pm  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, then decide if BP 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 BP.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.7%

Fail

 

1-year revenue growth > 12%

0%

Fail

Margins

Gross margin > 35%

10.7%

Fail

 

Net margin > 15%

3.1%

Fail

Balance sheet

Debt to equity < 50%

40.8%

Pass

 

Current ratio > 1.3

1.43

Pass

Opportunities

Return on equity > 15%

10.2%

Fail

Valuation

Normalized P/E < 20

12.50

Pass

Dividends

Current yield > 2%

5.2%

Pass

 

5-year dividend growth > 10%

(5.7%)

Fail

       
 

Total score

 

4 out of 10

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

Since we looked at BP last year, the company gave back one of the two points it picked up last year, as revenue flattened out. The stock hasn't done all that well either, falling about 5% over the past year.

Three years after its huge oil spill in the Gulf of Mexico, BP is still dealing with the aftermath of the damage. A federal trial in which BP faces billions in potential civil claims for damage from the spill started back in late February. Although some contractors, including Schlumberger subsidiary M-I LLC and Cameron International, have had claims against them in the lawsuit dismissed, BP and its two main co-defendants, rig owner Transocean and cement contractor Halliburton , have been offering their defense for the past couple of weeks, with BP getting its turn earlier this week.

Even with that threat hanging over its head, BP has made some big strategic moves as well. One key transaction involves selling its interest in the Russian TNK-BP joint venture to Russian oil giant Rosneft in exchange for close to a 20% stake in Rosneft and about $12.5 billion in net cash. The company will return about $8 billion of that cash to shareholders through stock buybacks, but it hopes that its Rosneft investment will continue paying lucrative dividends for years to come.

Another transaction last October involved BP selling its Texas City refinery to Marathon Petroleum for a base price of about $600 million. With earnout provisions, the refiner could pay BP an additional $700 million. With many major oil companies selling or spinning off refining assets, the move leaves BP with more money to invest in exploration activity.

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