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 Diebold (NYS: DBD) 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 Diebold.
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, Diebold isn't quite up to snuff. But it has an almost unparalleled record of raising dividends, and despite its slow growth, the company has kept up with changing times.
Diebold is known for everything from bank ATMs and cash-counting machines to security systems and monitoring. That may not be a sexy business, but it's becoming increasingly important as automation in the financial industry becomes a key part of boosting efficiency. With customer relationships from major regional bank BB&T (NYS: BBT) to tiny institutions like Community Trust Bancorp as well as banks around the world, Diebold has global reach.
But Diebold doesn't have the industry to itself. NCR (NYS: NCR) also makes ATMs, and it has found ways to expand into airport check-in kiosks as well as building up its Blockbuster Express rental machine business, which it sold to Coinstar earlier this year. Diebold remains the financial specialist, but NCR could still pose a threat to its core ATM business.
Meanwhile, a longer-term challenge may come from companies seeking to make ATMs a thing of the past. With cashless mobile payment systems using technology from NXP Semiconductors (NAS: NXPI) , Diebold ATMs could become obsolete in the near future. MasterCard and Visa (NYS: V) are both seeking to build up mobile payment networks that could bypass Diebold entirely.
Still, Diebold has time to adapt. Earlier this week, Diebold shares jumped after the company announced a strong quarter. Not only did revenue and earnings rise during the first quarter, but Diebold also boosted its guidance for the full year, raising earnings-per-share estimates by $0.20.
For Diebold to keep improving, it needs to find new avenues for growth. If it can throw its hat into the ring on the mobile payment front in a significant way, it could pave the way for a more profitable future.
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.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services have recommended buying shares of Coinstar, NXP Semiconductors, and Visa. 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.
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