Is Mechel 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, then decide if Mechel (NYS: MTL) 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 Mechel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||48.3%||Pass|
|1-Year Revenue Growth > 12%||55%||Pass|
|Margins||Gross Margin > 35%||35.8%||Pass|
|Net Margin > 15%||8.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||162%||Fail|
|Current Ratio > 1.3||1.25||Fail|
|Opportunities||Return on Equity > 15%||22.7%||Pass|
|Valuation||Normalized P/E < 20||4.44||Pass|
|Dividends||Current Yield > 2%||2.9%||Pass|
|5-Year Dividend Growth > 10%||(8.4%)||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of 6, Mechel seems as though it's doing pretty well. But the coal miner and steelmaker has seen its stock plunge over the past year, and a recent double hit bodes badly for the company's future.
Mechel is an integrated steelmaker that acts somewhat like two companies in one. On one hand, it competes in the same business as Peabody Energy (NYS: BTU) and Patriot Coal (NYS: PCX) by producing its own metallurgical coal. Yet rather than selling that coal to competing steelmakers like ArcelorMittal (NYS: MT) , the Russian company uses it in its own steel production.
Mechel tops the steel-company list in terms of growth, eclipsing Vale (NYS: VALE) , Steel Dynamics (NAS: STLD) , and ArcelorMittal on revenue and earnings growth. But the company has suffered greatly throughout the European sovereign debt crisis, beginning first with the Greek drama and continuing when Italy got into the picture. The crisis raises fears of economic slowdowns throughout Europe that would take away one of Mechel's prime export markets.
The worst news hit earlier this week, when Mechel said that it had to shut down two coal mines for safety concerns. Combined with the ongoing uncertainty in Europe, this caused shares to plunge more than 10%.
Mechel has the potential to be a perfect stock, and at a ridiculously low valuation right now, the time is right for value investors to step forward. But until Europe's situation gets clearer, you're unlikely to see much improvement.
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. The Motley Fool owns shares of ArcelorMittal. 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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