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 Marathon Petroleum Corp (NYSE:MPC) 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 Marathon Petroleum Corp (NYSE:MPC).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 8.9% | Fail |
| 1-year revenue growth > 12% | 4.1% | Fail | |
| Margins | Gross margin > 35% | 10% | Fail |
| Net margin > 15% | 4.4% | Fail | |
| Balance sheet | Debt to equity < 50% | 27.8% | Pass |
| Current ratio > 1.3 | 1.59 | Pass | |
| Opportunities | Return on equity > 15% | 31.4% | Pass |
| Valuation | Normalized P/E < 20 | 9.64 | Pass |
| Dividends | Current yield > 2% | 1.6% | Fail |
| 5-year dividend growth > 10% | NM | NM | |
| Total score | 4 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Marathon Petroleum paid its first dividend as a spun-off company in Total score = number of passes.
Since we looked at Marathon Petroleum last year, the company has dropped a point, with its dividend yield having fallen below 2%. But shareholders aren’t complaining one bit, as the stock has more than doubled over the past year.
Marathon Petroleum got spun off from its old parent company at just about the perfect time. Since 2011, refiners have enjoyed incredibly lucrative conditions, with spreads between crude oil and refined-product prices at high levels, and cheap domestic crude making refiners even more profitable. The conditions have been especially profitable for HollyFrontier Corp (NYSE:HFC) and Western Refining, Inc. (NYSE:WNR) , which have refineries located close to the cheapest sources of oil.
