Is Marathon Petroleum the Perfect Stock?
byMar 7th 2012 9:42AM
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 Marathon Petroleum (NYS: 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.
- 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 Marathon Petroleum.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.2%*||Fail|
|1-Year Revenue Growth > 12%||28.4%||Pass|
|Margins||Gross Margin > 35%||8.0%||Fail|
|Net Margin > 15%||3.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||34.8%||Pass|
|Current Ratio > 1.3||1.25||Fail|
|Opportunities||Return on Equity > 15%||26.9%||Pass|
|Valuation||Normalized P/E < 20||6.47||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Marathon Petroleum has only been an independent dividend-paying entity since June 2011. Total score = number of passes. *Past four years.
With five points, Marathon Petroleum finishes solidly in the middle of the road in its first year after its IPO. The refiner has seen plenty of ups and downs in the energy markets already, but for now, the environment looks bright for the company.
Marathon Petroleum is the newly spun-off company from Marathon Oil (NYS: MRO) and contains all of Marathon's legacy downstream refining and marketing assets. The company has refineries on the Gulf Coast and in the Midwest, and it owns a pipeline network for crude and refined products.
In a global economy, where a refinery happens to be may seem irrelevant. But as HollyFrontier (NYS: HFC) and Western Refining (NYS: WNR) have discovered, being in the right place at the right time -- close to sources of new oil production -- has big benefits. By contrast, less proximate refiners are suffering, with Sunoco (NYS: SUN) having decided lately to shut down operations at its refineries rather than incurring higher costs.
In its most recent quarter, Marathon reported an operating loss, due in part to lower margins following a jump in West Texas Intermediate crude prices. But recent increases in oil supply in North America have driven the spreads between Brent crude over WTI to higher levels, boding well for future profits.
To reach perfection, Marathon Petroleum needs oil prices to cooperate. If margins between oil and refined products remain high, then Marathon could continue to improve in the years to come.
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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