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 Rockwell Collins (NYS: COL) 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 Rockwell Collins.
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.
Since we looked at Rockwell Collins last year, the company has dropped a point. Falling share prices helped boost its dividend, but the company has higher debt than it did last year.
The defense industry has been under siege as the Pentagon contemplates major budget cuts. Although Rockwell's commercial business has grown well, a hit to its government business could have a big impact on overall results. As a result, its share price got smacked around and hasn't recovered much from last summer's lows. That stands in contrast to larger competitor Lockheed Martin (NYS: LMT) , which has rebounded sharply as defense cuts have arguably been less severe than they might have been.
One major opportunity for Rockwell lies in Boeing's (NYS: BA) Dreamliner. With Rockwell making displays and communications equipment for the aircraft, it could enjoy the benefits of Boeing's impressive order backlog for years to come.
Moreover, some have also seen Rockwell as a potential takeover candidate. United Technologies (NYS: UTX) was named as a possible suitor, but when it decided to go with Goodrich (NYS: GR) instead, it signaled that Rockwell would likely be on its own -- at least for a while.
In its most recent quarter, Rockwell posted mixed results. The company matched expectations, yet although earnings rose, sales fell from the year-ago quarter.
For Rockwell to get moving back in the right direction, it needs to find ways to grow and boost its profit margins. Moreover, its dividend is well below many of its rivals. If it can remedy those faults, then Rockwell could get a lot 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.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin. 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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