Has Noble Become the Perfect Stock?

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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 Noble Corp. (NYS: NE) 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 Noble Corp.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%4.5%Fail
 1-Year Revenue Growth > 12%(4.2%)Fail
MarginsGross Margin > 35%41.6%Pass
 Net Margin > 15%14.2%Fail
Balance SheetDebt to Equity < 50%50.3%Fail
 Current Ratio > 1.31.28Fail
OpportunitiesReturn on Equity > 15%4.7%Fail
ValuationNormalized P/E < 2038.81Fail
DividendsCurrent Yield > 2%1.4%Fail
 5-Year Dividend Growth > 10%47.4%Pass
    
 Total Score 2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Noble Corp. last year, the stock has suffered a big drop in its score, losing four points. With sales growth stopping in its tracks, weakening margins, a higher debt-to-equity ratio, and a richer multiple, Noble needs to act now to get things moving back in the right direction.

Noble took a big hit a couple of years ago when drilling in the Gulf of Mexico came to a halt following the Gulf oil spill. But now, activity in the Gulf is getting back to normal, which should be a positive for the company.

One big element of Noble's long-term strategy has been getting into the ultra-deepwater drillship niche. That's been a smart move lately, as shallow-water specialistHercules Offshore (NAS: HERO) has posted losses and missed out on the more profitable deeper waters.

Yet the deepwater niche may be getting crowded. SeaDrill (NYS: SDRL) continues to add new ultra-deepwater rigs to its already impressive arsenal. DryShips (NAS: DRYS) completed a spin-off of its Ocean Rig (NAS: ORIG) subsidiary, which took on four new drillships last year and appears poised to continue to grow now that it trades independently from its dry-bulk parent.

In its most recent quarterly report, the company cited "unacceptable levels of non-productive time" for its lagging sales and higher costs. As its fleet gets bigger, it'll become a greater challenge for Noble to keep its operations working to capacity.

For Noble to move back toward perfection, it needs to get its financial house in order. If energy prices stay high, then fixing some internal inefficiencies and continuing to build up its resources should get Noble looking up again.

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.

If you like energy stocks, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.

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

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of SeaDrill. 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.

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

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