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 KBR (NYS: KBR) 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 KBR.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.2%||Fail|
|1-Year Revenue Growth > 12%||(11.9%)||Fail|
|Margins||Gross Margin > 35%||7.2%||Fail|
|Net Margin > 15%||5.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||4.0%||Pass|
|Current Ratio > 1.3||1.47||Pass|
|Opportunities||Return on Equity > 15%||22.1%||Pass|
|Valuation||Normalized P/E < 20||10.98||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||0%*||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Since KBR initiated its dividend in March 2008.
With four points, KBR hasn't yet built a perfect record. The company is in a strong industry, but so far it hasn't found a way to capitalize on it fully.
KBR provides engineering and construction services around the world, serving the energy industry as well as creating infrastructure and defense equipment. With all the energy development activity going on in far-flung parts of the globe, KBR and peers Jacobs Engineering Group (NYS: JEC) , McDermott (NYS: MDR) , and Foster Wheeler (NAS: FWLT) seem to be in the right place.
But with emerging economies starting to slow down and fears of a European financial catastrophe overhanging the stock markets, KBR has seen its shares drop substantially in recent months. Higher costs have also likely played a role in the drop.
Earlier this week, KBR announced what could be the beginning of a turnaround. In going over its expected plans for 2012, the company confirmed earnings guidance in line with analyst estimates. From the stock's response -- it jumped more than 10% at its highs -- it's clear that investors share CEO Bill Utt's enthusiasm.
One project KBR is working on involves a proposed liquefied natural gas export terminal in east Africa. Although it's only in the concept stage, KBR has partnered up with Anadarko (NYS: APC) on the project. With numerous players including Cheniere Energy (ASE: LNG) and EnCana (NYS: ECA) involved in liquid natural gas projects of their own, this could be an exciting area going forward.
For KBR to keep improving, it needs to convert its projects into solid revenue and reverse its sales declines. If energy prices cooperate and the global economy rebounds, then things could look much better for KBR soon.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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