Has Provident Energy 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, then decide if Provident Energy (NYS: PVX) 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 Provident Energy.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | (1.8%) | Fail |
1-Year Revenue Growth > 12% | 14.7% | Pass | |
Margins | Gross Margin > 35% | 19.3% | Fail |
Net Margin > 15% | (9.1%) | Fail | |
Balance Sheet | Debt to Equity < 50% | 90.0% | Fail |
Current Ratio > 1.3 | 1.33 | Pass | |
Opportunities | Return on Equity > 15% | 23.1% | Pass |
Valuation | Normalized P/E < 20 | 25.38 | Fail |
Dividends | Current Yield > 2% | 4.8% | Pass |
5-Year Dividend Growth > 10% | (16.5%) | Fail | |
Total Score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Provident Energy last year, the energy infrastructure company has quadrupled its score, with gains in sales growth, balance sheet health, and returns on equity contributing to the jump. But given its being in the right place at the right time, it looks like Provident won't be an independent entity much longer.
Provident Energy fell off the radar screen for many investors when it lost its status as a Canadian royalty trust. As with fellow Canroy Penn West Petroleum (NYS: PWE) , which focuses more on production rather than midstream processing and transport, the move from the Canadian government cost Provident some tax benefits and eventually led to a dividend cut.
But with attention focused on unconventional energy plays, Provident has the perfect mix of exposure. It covers not only the Albertan oil sands but also the Bakken and Marcellus shale plays. In particular, Provident has focused on processing and transporting natural gas liquids, which are far more lucrative than gaseous methane production.
A couple of weeks ago, Pembina Pipeline announced a takeover bid to buy Provident for $3.1 billion in stock. The move will help diversify Pembina's operations and complement its recent deal with EnCana (NYS: ECA) to take on a 65% interest in a natural-gas-liquids extraction and processing plant in Alberta. It will also put Pembina in a better competitive position to challenge Enbridge (NYS: ENB) and TransCanada (NYS: TRP) , both of which have been moving as quickly as possible to take advantage of the energy boom in the Great White North. Takeover speculation in Provident has run rampant for some time, so it seemed inevitable that some company would pick up the midstream company.
Provident will never reach perfection in its current form. But once shares of Pembina come public on the New York Stock Exchange, investors may want to take a close look at Provident's acquirer to see if it might be the perfect stock.
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.
Provident Energy's chance at perfection may be over, but we've got three stocks we think can do just as well or better for you. Read about stocks that are thriving from $100 oil in the Motley Fool's latest free special report -- it's yours free by clicking here, but only for a limited time.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of TransCanada. 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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