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 Electronics For Imaging (NAS: EFII) 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 Electronics For Imaging.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Electronics For Imaging doesn't paint a very pretty picture. The company has seen growth pick up in the past year, but it still trades at a pricey valuation, reflecting lofty growth expectations that might be overstated.
Electronics For Imaging makes a number of products designed to help facilitate printing. From controllers that help printers connect to networks and software that helps manage networked devices to ink and hardware that actually get printing jobs done, Electronics For Imaging aims to offer complete printing solutions.
Several big customers have taken Electronics For Imaging up on that offer. The company counts R.R. Donnelley (NAS: RRD) as a commercial printing direct-sales client and FedEx (NYS: FDX) as an office supply and services customer. But in large part, Electronics For Imaging relies on distribution deals with major printer and copier companies, counting Hewlett-Packard (NYS: HPQ) and 3M (NYS: MMM) among those it has made deals with. If customers decide to stop outsourcing to Electronics For Imaging, then it could hit the company hard.
Lately, though, that hasn't happened. In its most recent quarter, the company posted its ninth straight quarter of double-digit sales growth and projected more strength for the current quarter.
For Electronics For Imaging to keep moving forward, it needs to find ways to boost its margins and bring up its returns on equity. If it can do that and keep growing, then the company could get much closer to perfection in the years ahead.
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.
Electronics For Imaging may not be 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 Electronics For Imaging to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of 3M and FedEx, as well as creating a diagonal call position in 3M. 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.