Is Eastman Kodak 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 Eastman Kodak (NYS: EK) 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 Eastman Kodak.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%(12.5%)Fail
 1-Year Revenue Growth > 12%(16.7%)Fail
MarginsGross Margin > 35%18.5%Fail
 Net Margin > 15%(16.3%)Fail
Balance SheetDebt to Equity < 50%NMNM
 Current Ratio > 1.31.38Pass
OpportunitiesReturn on Equity > 15%NMNM
ValuationNormalized P/E < 20NMNM
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 1 out of 7

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Eastman Kodak has negative shareholder equity and negative earnings for the period. Total score = number of passes.

Eastman Kodak can only snap up a single point. The former king of Kodachrome is just a shell of its former self.

Kodak once dominated the photography industry, with its film a ubiquitous part of everyone's lives. But with the advent of digital photography, film has largely become obsolete, undermining a big part of Kodak's business model.

As revenue has slid, Kodak has tried to take its place in the digital world. Lately, though, that has meant defending its patents against infringement, with Kodak suing Apple (NAS: AAPL) and Research In Motion (NAS: RIMM) for its photo preview technology.

With the rest of its business on the cusp of disappearing, it now appears that Kodak's exit strategy could be to sell itself for its intellectual property. That's understandable, as the fight for bankrupt Nortel's patent portfolio, Google's (NAS: GOOG) purchase of Motorola Mobility (NYS: MMI) , and the roller-coaster ride for InterDigital (NAS: IDCC) all show how valuable patents can be. Estimates put the value of Kodak's patents at as much as five times its market cap, which has spurred big gains for the stock in recent days.

At this point, just about the only perfect outcome for investors would be a buyout at a premium price. Short of that, it's tough to see Kodak getting back to its glory days.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Research in Motion, Google, and Apple.Motley Fool newsletter serviceshave recommended buying shares of InterDigital, Google, and Apple, as well as creating a bull call spread position in Apple. 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 adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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