Is Shuffle Master 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 Shuffle Master (NAS: SHFL) 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 Shuffle Master.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 9.3% | Fail |
1-year revenue growth > 12% | 12.1% | Pass | |
Margins | Gross margin > 35% | 61.8% | Pass |
Net margin > 15% | 11.3% | Fail | |
Balance sheet | Debt to equity < 50% | 33.8% | Pass |
Current ratio > 1.3 | 3.26 | Pass | |
Opportunities | Return on equity > 15% | 12.7% | Fail |
Valuation | Normalized P/E < 20 | 19.47 | Pass |
Dividends | Current yield > 2% | 0% | Fail |
5-year dividend growth > 10% | 0% | Fail | |
Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Shuffle Master deals up a midrange score of five. The company is hugely dependent on the casino industry, which has had its own share of ups and downs over the past several years.
Shuffle Master makes card-shuffling machines for casino table games. Like slot machine makers WMS Industries (NYS: WMS) and International Game Technology (NYS: IGT) , Shuffle Master relies on a healthy gaming industry for strong results.
Three years ago, it looked like Las Vegas might be the biggest casualty of the financial crisis. Heavily levered casino companies Las Vegas Sands (NYS: LVS) and MGM Resorts (NYS: MGM) saw their stocks plunge as the viability of their expansion plans came into question. But their recovery -- which came largely because of international growth -- paved the way for supporting companies like Shuffle Master to rebound as well.
Also, Shuffle Master took steps to smooth its revenue stream by moving from a sales-based model to leasing its machines. That was a painful move at first, but now, the company's cash flow isn't quite as lumpy as it used to be.
With a new CEO at the helm and its international prospects looking good, Shuffle Master makes for an interesting play. It's not a perfect stock, but Shuffle Master could still deal shareholders a winning hand.
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 Shuffle Master 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 thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of International Game Technology. 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.
