Has Marathon Petroleum Become the Perfect Stock?

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 and then decide whether Marathon Petroleum 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.
  • Moneymaking 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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

8.9%

Fail

 

1-year revenue growth > 12%

4.1%

Fail

Margins

Gross margin > 35%

10%

Fail

 

Net margin > 15%

4.4%

Fail

Balance sheet

Debt to equity < 50%

27.8%

Pass

 

Current ratio > 1.3

1.59

Pass

Opportunities

Return on equity > 15%

31.4%

Pass

Valuation

Normalized P/E < 20

9.64

Pass

Dividends

Current yield > 2%

1.6%

Fail

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Marathon Petroleum paid its first dividend as a spun-off company in Total score = number of passes.

Since we looked at Marathon Petroleum last year, the company has dropped a point, with its dividend yield having fallen below 2%. But shareholders aren't complaining one bit, as the stock has more than doubled over the past year.

Marathon Petroleum got spun off from its old parent company at just about the perfect time. Since 2011, refiners have enjoyed incredibly lucrative conditions, with spreads between crude oil and refined-product prices at high levels, and cheap domestic crude making refiners even more profitable. The conditions have been especially profitable for HollyFrontier and Western Refining , which have refineries located close to the cheapest sources of oil.

Marathon, though, isn't going to miss out on cheap North American crude. The company has boosted its refinery capacity at its Detroit facility to use more Canadian heavy crude, which is extremely inexpensive compared with U.S. crude. By doing so, it hopes to cut its overall input costs and send profits even higher.

Marathon has also jumped onto the MLP bandwagon, having done an initial public offering of its midstream business into MPLX . Initially supported by assets contributed by Marathon, MPLX will be a big player in the eastern U.S., as it focuses on the Utica, Marcellus, and Illinois Basin shale plays.

For Marathon to improve, it needs to push its dividend higher to help shareholders participate more strongly in its success. Over time, the potential for revenue growth could also help Marathon get a lot closer to perfection than it is today.

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.

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

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

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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