Has EOG Resources Become the Perfect Stock?
Jun 6th 2012 10:17AM
Updated Jun 6th 2012 10:18AM
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 EOG Resources (NYS: EOG) 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 EOG Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||22.6%||Pass|
|1-Year Revenue Growth > 12%||53.2%||Pass|
|Margins||Gross Margin > 35%||59.5%||Pass|
|Net Margin > 15%||13.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||38.6%||Pass|
|Current Ratio > 1.3||1.10||Fail|
|Opportunities||Return on Equity > 15%||10.3%||Fail|
|Valuation||Normalized P/E < 20||22.99||Fail|
|Dividends||Current Yield > 2%||0.7%||Fail|
|5-Year Dividend Growth > 10%||19.2%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at EOG Resources last year, the company has kept its five-point score. A definite improvement in profitability helped the gas giant overcome a drop in its current ratio, but the stock has suffered from plunging natural gas prices throughout much of the past year.
EOG has become a much bigger player in the oil and gas market with the success of its position in the Eagle Ford shale play. The company has operations in a wide array of locations, including the Bakken and Marcellus areas, but its concentration of positions in Texas dominates its holdings. Although the company has experienced the same challenges as Chesapeake Energy (NYS: CHK) in dealing with low prices for natural gas, EOG has had substantial growth in more lucrative natural-gas liquids in 2011 and hopes to continue that trend going forward.
Cost management has become crucial in the energy industry, and EOG's foresight has helped it reduce costs. For instance, in 2008, the company bought a sand plant that it now uses for hydraulic fracturing in the Eagle Ford. As with Pioneer Natural Resources (NYS: PXD) , which also bought its own sand company, EOG has saved millions especially now that high-quality sand is much more costly.
But another driver of natural gas prices in the long run may come from exporting it via liquefied natural gas terminals. EOG is working with Encana (NYS: ECA) and Apache to build a terminal on Canada's west coast to export LNG to Asian markets, going up against Cheniere Energy (NYS: LNG) and its terminal subsidiary's venture to expand its Sabine Pass terminal to allow LNG export. The result could be firmer gas prices in the U.S. once excess supply has somewhere to go.
For EOG to keep improving, it needs higher energy prices to help it become more profitable. Recent price action suggests that may not happen, but EOG is still a promising energy play with a great deal of potential in the long run.
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 in this article. The Motley Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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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