Has Ctrip.com Become 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 Ctrip.com (NAS: CTRP) 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 Ctrip.com.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%35.0%Pass
 1-Year Revenue Growth > 12%21.4%Pass
MarginsGross Margin > 35%77.0%Pass
 Net Margin > 15%30.8%Pass
Balance SheetDebt to Equity < 50%0%Pass
 Current Ratio > 1.32.49Pass
OpportunitiesReturn on Equity > 15%16.3%Pass
ValuationNormalized P/E < 2024.02Fail
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ctrip.com last year, the company has kept the same seven-point score. But a huge drop in the share price has allowed earnings to catch up to valuations as much slower growth has long-term investors worried about Ctrip's future.

The travel portal business has largely become about one winner and a bunch of losers. Priceline.com (NAS: PCLN) has leapt past analyst estimates quarter after quarter, as the company manages to grow profits at an even faster pace than revenue. Competitors Expedia (NAS: EXPE) and Orbitz (NYS: OWW) haven't been able to keep up, and their share prices have suffered as a result.

Even with the strength of a growing Chinese consumer base behind it, Ctrip has also failed to keep up with priceline's growth. But higher costs, including marketing, administrative, and product-development expenses, have held Ctrip's bottom line back, and the resulting margin compression combined with slower revenue expansion has hit the stock hard. Ctrip is still more profitable than India's MakeMyTrip (NAS: MMYT) , but the Indian travel company is making longer strides toward becoming a major force in its own home emerging market.

For Ctrip to recover, it needs to get internal financial controls back in line. Only if it can start moving earnings back in the right direction will Ctrip make the final step toward becoming a 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.

Ctrip.com isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

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

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Ctrip.com. Motley Fool newsletter services have recommended buying shares of priceline.com and Ctrip.com. 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.

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