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 and then decide whether Textron (NYS: TXT) 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.
Moneymaking 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 Textron.
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%
2 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Textron last year, the company has gained a point, thanks to a cheaper valuation. Even better, that lower multiple didn't come at the expense of shareholders, who have seen the stock rise about 40% over the past year.
Textron operates a variety of industrial and aerospace businesses, including the well-known Cessna line of aircraft, but its main revenue driver is its Bell Helicopter segment. Like larger conglomerates Honeywell (NYS: HON) and United Technologies (NYS: UTX) , Textron in general and Bell in particular relies on U.S. military spending to drive its income. Although commercial helicopter sales have been strong, statements that the V-22 Osprey Marine Corps helicopter could be vulnerable to budget cuts haven't added to investor confidence.
Earlier this year, Textron got good news when Berkshire Hathaway's (NYS: BRK.A) (NYS: BRK.B) NetJets division chose to spend $9.6 billion on 425 business jets. Rival Bombardier got the majority of the order, but Textron will still get to deliver 150 planes beginning in 2016.
Last week, though, Textron released disappointing earnings, sending the stock tumbling more than 10% at one point on Wednesday before recovering. Despite weakness from the Cessna division during July and August, Textron expects better numbers for the rest of the year, but a boost in earnings guidance for the full year wasn't enough to make investors happy.
For Textron to improve, it needs to capitalize on the recent jump in commercial aircraft purchasing activity and reap its fair share of orders. If it can't do that, then Textron may never get much closer to perfection.
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.
Textron benefits from doing business with Berkshire Hathaway, but Berkshire's long track record of success has made Warren Buffett one of the best investors of all time. With Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, The Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as competing reasons to buy or sell the stock now. Claim a copy by clicking here now.
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The article Has Textron Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Textron. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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