Has Iridium Communications 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 Iridium Communications (NAS: IRDM) 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 Iridium Communications.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-year annual revenue growth > 15%12.7%Fail
 1-year revenue growth > 12%8.0%Fail
MarginsGross margin > 35%67.2%Pass
 Net margin > 15%11.3%Fail
Balance sheetDebt to equity < 50%61.6%Fail
 Current ratio > 1.31.23Fail
OpportunitiesReturn on equity > 15%6.3%Fail
ValuationNormalized P/E < 2015.05Pass
DividendsCurrent yield > 2%0%Fail
 5-year dividend growth > 10%0%Fail
    
 Total score 2 out of 10

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

Since we looked at Iridium Communications last year, the company's score has fallen by three points. A much uglier balance sheet and far slower revenue growth resulted in the drop, but the stock has actually held up reasonably well over the past year.

For most U.S. consumers, the wireless networks of AT&T, Verizon, and Sprint Nextel (NYS: S) provide enough coverage area to meet most of their needs. Sure, you may find yourself in a dead zone from time to time, but for the most part, being out of touch during those rare times causes only minimal inconvenience.

But for some uses -- ranging from aircraft navigation to deepwater drilling -- cell towers simply aren't an option. That's the niche that Iridium serves, helping its customers stay connected where other solutions fail. Its products, which include both satellite phone hardware as well as Wi-Fi and satellite service, aren't as inexpensive as traditional carriers, but Iridium's network of satellites ensures coverage even in the most remote parts of the world.

The company has an impressive list of customers. Airlines Delta (NYS: DAL) and Continental are among Iridium users, as are numerous government agencies. Energy companies Schlumberger (NYS: SLB) and ConocoPhillips (NYS: COP) use the services as well for machine-to-machine data transmission.

In its most recent quarter, Iridium posted stronger earnings than expected but fell short on sales. Still, the company has a competitive opportunity, as rival Inmarsat has had to increase its prices. If Iridium can capitalize on that opportunity to poach users from Inmarsat, it could be the catalyst to reignite growth and get the company moving back toward perfection.

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.

Iridium Communications 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 Iridium Communications 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 Iridium Communications. Motley Fool newsletter services have recommended buying shares of Schlumberger. 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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