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.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | 30.3% | Pass |
1-Year Revenue Growth > 12% | 168% | Pass | |
Margins | Gross Margin > 35% | 17.4% | Fail |
Net Margin > 15% | 1.9% | Fail | |
Balance Sheet | Debt to Equity < 50% | 97.4% | Fail |
Current Ratio > 1.3 | 1.54 | Pass | |
Opportunities | Return on Equity > 15% | 7.2% | Fail |
Valuation | Normalized P/E < 20 | 10.81 | Pass |
Dividends | Current Yield > 2% | 1.6% | Fail |
5-Year Dividend Growth > 10% | 16.7% | Pass | |
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.
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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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