Has Schlumberger 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 Schlumberger (NYS: SLB) 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 Schlumberger.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.2%||Pass|
|1-Year Revenue Growth > 12%||35.6%||Pass|
|Margins||Gross Margin > 35%||20.9%||Fail|
|Net Margin > 15%||12.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||31.3%||Pass|
|Current Ratio > 1.3||1.97||Pass|
|Opportunities||Return on Equity > 15%||16.1%||Pass|
|Valuation||Normalized P/E < 20||18.52||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||13.3%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Schlumberger last year, the company has boosted its score by two points. Better long-term revenue growth and a greatly reduced valuation are responsible for the improvement, although a 25% decline in the shares hasn't made shareholders very happy.
Schlumberger is a giant in the energy-services industry, helping oil and gas drillers with just about every aspect of their operations. Between providing pipe and drill bits, seismic services, and fracking techniques, the company has all its bases covered.
But recently, Schlumberger has started seeing some weakness. Falling profit margins have allowed competitors National Oilwell Varco (NYS: NOV) and Halliburton (NYS: HAL) to catch up with or overtake Schlumberger, and if the trend continues, it could eventually cause Schlumberger to lose its leadership position in the industry.
As long as growth in the industry continues, Schlumberger will see heightened competition. Baker Hughes (NYS: BHI) remains a growing generalist in the industry, while Halliburton and tiny C&J Energy Services (NYS: CJES) are focused on shale-gas plays, and National Oilwell Varco has become the go-to source for oilfield equipment. By attacking niches, Schlumberger's competitors may end up collectively flanking the services giant.
For Schlumberger to keep improving, it needs to counter its competitors' moves and take steps to shore up its position atop the oilfield services industry. As long as energy enjoys its current boom, Schlumberger has a chance to advance toward perfection.
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.
Schlumberger is a smart way to play the energy space, but we've got another stock you should also look at more closely. 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 Schlumberger to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Schlumberger Become the Perfect Stock? originally appeared on Fool.com.Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco and Halliburton. 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.