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 Republic Services (NYS: RSG) 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 Republic Services.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Republic Services last year, the company hasn't been able to gain back the point it lost from 2010 to 2011. Revenue has remained pretty much stagnant this year, and the stock has actually lost a little ground, falling about 5% in the past year.
Republic often gets lost in the shuffle of the waste industry, which Waste Management (NYS: WM) dominates. But the company really gained in importance after its 2008 merger with Allied Waste, which combined the No. 2 and No. 3 players in the industry under one roof. Although revenue hasn't moved much since the merger, cost savings from the merger have helped Republic's margins, which are more than a percent and a half higher than Waste Management's. It also no longer needs to worry about direct competition from Veolia Environnement (NYS: VE) , which abandoned the U.S. trash collection business in a recent move to reorganize and refocus on its core markets.
Still, Republic can't just stand still in the face of ambitious competitors. For instance, Stericycle (NAS: SRCL) has focused on the medical-waste-disposal industry, a niche that should provide solid growth for years to come thanks to favorable demographic trends. With margins much higher than traditional waste collection, Stericycle's medical-waste emphasis poses an obstacle to keep Republic from expanding into the lucrative area.
Republic is taking steps to innovate and keep up with improving technology. Its partnership with Clean Energy Fuels (NAS: CLNE) involves using natural-gas-powered vehicles for waste hauling and other transportation needs. As long as natural gas stays cheap, this move should be a winner for Republic.
For Republic to improve, it needs to focus on finding new sources of revenue and on continuing to work its debt levels down. Slowly but surely, though, Republic has plenty of potential to become a perfect stock down the line.
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.
Republic Services' partnership with Clean Energy Fuels is a smart move toward using alternative energy for lower costs and a cleaner environment. With plenty of potential to add its trucks to corporate fleets across the nation, Clean Energy Fuels looks like a promising investment. But is Clean Energy Fuels a buy right now? Read our new premium report on the stock and get the answers you need. Just click here to get started.
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The article Has Republic Services Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels and Waste Management. Motley Fool newsletter services recommend Clean Energy Fuels, Republic Services, Stericycle, Veolia Environnement, and Waste Management. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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