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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(1.3%)

Fail

 

1-year revenue growth > 12%

(14.7%)

Fail

Margins

Gross margin > 35%

7.4%

Fail

 

Net margin > 15%

2.6%

Fail

Balance sheet

Debt to equity < 50%

3.8%

Pass

 

Current ratio > 1.3

1.58

Pass

Opportunities

Return on equity > 15%

10.1%

Fail

Valuation

Normalized P/E < 20

16.71

Pass

Dividends

Current yield > 2%

1%*

Fail

 

5-year dividend growth > 10%

9.9%*

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes. * Based on forward-looking dividend payout.

Since we looked at KBR last year, the company has lost a point, with return on equity suffering. The stock hasn't done too badly, though, gaining about 10% over the past year.

KBR is an engineering firm that primarily provides construction and technical services for energy, infrastructure, and power projects. With the boom in energy over the past several years, that's been a lucrative source of revenue throughout the industry, with big backlogs and strong demand among most of the major players.

But KBR has lagged behind some of its bigger rivals. Industry giant Fluor (NYS: FLR) has a huge backlog of more than $40 billion, nearly tripling KBR's figure. Jacobs Engineering (NYS: JEC) also tops KBR's $14.8 billion backlog, and both Jacobs and Fluor have posted better returns on equity than KBR. Moreover, KBR has raised some concerns about corporate governance, with an executive doing prison time for bribing officials in Nigeria and the company suing an activist investor for seeking to change KBR's staggered-election format for picking its board of directors.

News that Chicago Bridge & Iron (NYS: CBI) is buying KBR rival Shaw Group (NYS: SHAW) for $3 billion shows just how promising the industry is right now. As energy continues to strengthen, further consolidation is certainly possible.

Earlier this week, KBR shared the wealth with investors by raising its dividend by 60%. On a forward basis, that pushed the yield above 1%, but it still represents a relative pittance in returning substantial capital to shareholders.

For KBR to improve, a takeover bid would be a quick way to cash out for a nice profit. More realistically, though, KBR needs to reverse its recent revenue slide and find ways to boost its profitability. That's its best chance at pushing toward perfection in the years ahead.

Keep searching
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.

Looking to do better than KBR? The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

Click here to add KBR to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has KBR Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Fluor. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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