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 Suncor Energy Inc. (USA) (NYSE:SU) 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). Moneymaking 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 Suncor Energy.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 17.2% | Pass |
| 1-year revenue growth > 12% | (2.9%) | Fail | |
| Margins | Gross margin > 35% | 53.4% | Pass |
| Net margin > 15% | 7.3% | Fail | |
| Balance sheet | Debt to equity < 50% | 28.1% | Pass |
| Current ratio > 1.3 | 1.48 | Pass | |
| Opportunities | Return on equity > 15% | 7.2% | Fail |
| Valuation | Normalized P/E < 20 | 11.41 | Pass |
| Dividends | Current yield > 2% | 1.6% | Fail |
| 5-year dividend growth > 10% | 21.4% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Suncor Energy last year, the company gave back one of the 2 points it gained from 2011 to 2012. Revenue fell, and the stock followed with about a 5% decline over the past year.
Suncor has had to deal with the same headwinds that many of its energy-related peers recently. With oil prices in North America remaining fairly stagnant under a glut of unconventional production from shale plays and other new finds, Suncor hasn’t seen the revenue growth it enjoyed in past years. Moreover, with Suncor’s oil sands production coming with a relatively high cost structure, the company is less able than its peers to take risks that rely on having oil avoid even modest price declines in the future.
Still, Suncor has avoided more substantial losses that Canadian Natural Resource Ltd (USA) (NYSE:CNQ) and Penn West Petroleum Ltd (USA) (NYSE:PWE) have suffered for one reason: It has refinery capacity conveniently located near its Alberta production sites, helping it avoid the infrastructure bottleneck that has constrained its competitors from shipping heavy crude from the sands to outside refineries. A pipeline project from Enbridge Inc (USA) (NYSE:ENB) should take at least another year to complete, giving Suncor valuable time to profit from its competitive advantage.
In its most recent earnings report, Suncor posted somewhat disappointing results, missing earnings and revenue estimates by a wide margin. The big concern investors have is that Suncor may choose not to follow through on expanding its Voyageur upgrader facility, having taken a $1.5 billion writeoff on the long-delayed joint venture with TOTAL S.A. (ADR) (NYSE:TOT). That could hurt both companies going forward.
For Suncor to improve, it needs to come up with a strategic vision that encompasses the economic realities of the oil sands right now. By overcoming maintenance issues with its Newfoundland operations and successfully fighting a huge billion-dollar tax bill from Canada’s revenue agency, Suncor could well see margins improve and get the stability to boost its dividend further, pushing the stock closer to perfection.
The article Has Suncor Energy 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 Total.
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