Is ICON the Perfect Stock?

Before you go, we thought you'd like these...
Before you go close icon

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 ICON (NAS: ICLR) 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 ICON.

FactorWhat We Want to SeeActualPass or Fail?
Growth5-Year Annual Revenue Growth > 15%16.9%Pass
 1-Year Revenue Growth > 12%3.2%Fail
MarginsGross Margin > 35%37.5%Pass
 Net Margin > 15%6.9%Fail
Balance SheetDebt to Equity < 50%0%Pass
 Current Ratio > 1.32.20Pass
OpportunitiesReturn on Equity > 15%9.7%Fail
ValuationNormalized P/E < 2025.69Fail
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With four points, Icon comes in just shy of the midpoint toward perfection. The company has an interesting niche in the pharmaceutical industry, and it should be interesting to see if it can cash in on Big Pharma's trend toward outsourcing some of its research operations.

ICON is a contract research organization, which means that it works with well-known pharmaceutical companies to do research and development of potential new drugs. For years, major drug companies have outsourced R&D; Eli Lilly (NYS: LLY) , for instance, sold a research site to CRO Covance (NYS: CVD) in 2008 and made an agreement for Covance to help it develop drugs over the ensuing decade. ICON itself made a deal with Pfizer (NYS: PFE) whereby it was named one of two CROs Pfizer considers preferred clinical-trial providers.

ICON has plenty of competition from fellow CROs Parexel (NAS: PRXL) , Charles River Labs (NYS: CRL) , and Pharmaceutical Product Development (NAS: PPDI) . But one thing that Fool analyst Michael Olsen thinks makes ICON a particularly good value right now is the misperception that having its corporate headquarters in Ireland somehow leaves it more exposed to potential economic problems in Europe than its competitors. Given the global nature of the pharmaceutical business, that distinction just doesn't make sense.

Even after a recent price drop, ICON shares aren't all that cheap, and unlike Pharmaceutical Product Development, ICON doesn't pay a dividend. But with lots of blockbuster drugs coming off patent in the near future, the push is on for pharma companies to develop new drugs, and that should help ICON and its peers. ICON isn't a perfect stock right now, but if things go well in its deal with Pfizer, its prospects should improve in the coming years.

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 ICON 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 ICON and Charles River Laboratories International.Motley Fool newsletter serviceshave recommended buying shares of Pfizer and Pharmaceutical Product Development. 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.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners