Has Rock-Tenn Become 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 Rock-Tenn (NYS: RKT) 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 Rock-Tenn.


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%



Balance Sheet

Debt to Equity < 50%



Current Ratio > 1.3




Return on Equity > 15%




Normalized P/E < 20




Current Yield > 2%



5-Year Dividend Growth > 10%



Total Score

5 out of 10

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

Since we looked at Rock-Tenn last year, the company has picked up two points. Despite an acquisition that boosted revenue strongly, the shares have dropped about 25% in the past year as returns on equity and margins took a big hit after the buyout.

Rock-Tenn's big sales growth comes from its $3.5 billion buyout of Smurfit-Stone Container last year. Although activist investor Dan Loeb and his Third Point investment company opposed the buyout, arguing that it didn't give Smurfit-Stone shareholders fair value, the merger went forward regardless, and now Rock-Tenn has been able to stay competitive in light of International Paper's (NYS: IP) buyout of shipping-box maker Temple-Inland.

But Rock-Tenn hasn't yet turned the acquisition into huge profits. Its returns on equity lag behind both International Paper and peer Packaging Corp. of America (NYS: PKG) , and although Rock-Tenn has been closing several North American Smurfit-Stone plants to realize cost savings, it hasn't yet seen the full benefits from its merger that it expects to realize in the long run.

Another step Rock-Tenn is taking to cut costs is to hook into cheap natural gas. The company broke ground with TECO Energy (NYS: TE) on a pipeline to deliver gas to a Rock-Tenn mill in Florida.

For Rock-Tenn to keep improving, it would definitely like to see continuing benefits from its Smurfit-Stone merger. With a challenging environment for forest products generally that has kept Weyerhaeuser (NYS: WY) and other industry leaders from reaching their full potential, Rock-Tenn needs to make the most of its strengths to strive toward perfection in the future.

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.

Rock-Tenn 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.

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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 Rock-Tenn and Weyerhaeuser. 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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