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 Exxon Mobil Corporation (NYSE:XOM) 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:
1). 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.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). 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.
4). Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). 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.
6). 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 ExxonMobil.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 4.5% | Fail |
| 1-year revenue growth > 12% | 3.8% | Fail | |
| Margins | Gross margin > 35% | 26.5% | Fail |
| Net margin > 15% | 10.0% | Fail | |
| Balance sheet | Debt to equity < 50% | 7.2% | Pass |
| Current ratio > 1.3 | 1.03 | Fail | |
| Opportunities | Return on equity > 15% | 28.6% | Pass |
| Valuation | Normalized P/E < 20 | 8.89 | Pass |
| Dividends | Current yield > 2% | 2.6% | Pass |
| 5-year dividend growth > 10% | 9.7% | Fail | |
| Total score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ExxonMobil last year, the company has dropped a point after staying flat the previous year. Falling revenue was to blame, and the stock has only climbed about 5% over the past year.
The energy markets have been tough to navigate lately. The huge boom in unconventional production in the U.S. has started to spread around the world, yet Exxon has had trouble keeping its production volumes up. Moreover, with prices for U.S. oil and gas remaining extremely depressed compared to world benchmarks, Exxon’s U.S. activity has created challenges to growth.
In response, Exxon has used its global scope to seek out better opportunities. A potential Alaskan nat-gas pipeline and LNG joint venture with BP plc (ADR) (NYSE:BP) and ConocoPhillips (NYSE:COP) would have huge capital demands that would tax even Exxon’s massive balance sheet, but if it opens Asia’s markets to Alaskan natural gas, it could be a big win for the companies involved. But concerns persist, with Exxon walking a political tightrope in Iraq as it tries to do lucrative deals both with the Iraqi central government and the Kurdish regional government.
In its most recent earnings report, Exxon managed to post minimal growth in earnings even as revenue fell. Still, signs of early success in its relationship with Russia’s Rosneft over potential Arctic development, as well as new activities off the coasts of South Africa and Canada’s eastern coast, could eventually help replace some lost production.
For Exxon to improve, it needs to hold off Chevron Corporation (NYSE:CVX) , which has been more aggressive with its attempts to expand internationally. Right now is when oil giants are drawing important battle lines that will govern the industry for decades to come, and Exxon needs to jump in with both feet in order to defend its leadership role.
The article Has ExxonMobil Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron.
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