Has Beam 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 Beam (NYS: BEAM) 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 Beam.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | (21.2%) | Fail |
1-year revenue growth > 12% | 5% | Fail | |
Margins | Gross margin > 35% | 58.7% | Pass |
Net margin > 15% | 14.4% | Fail | |
Balance sheet | Debt to equity < 50% | 56.2% | Fail |
Current ratio > 1.3 | 2.89 | Pass | |
Opportunities | Return on equity > 15% | 6.7% | Fail |
Valuation | Normalized P/E < 20 | 26.67 | Fail |
Dividends | Current yield > 2% | 1.3% | Fail |
5-year dividend growth > 10% | (12.7%) | Fail | |
Total score | 2 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Beam last year, the company has had its score slashed in half, as rising debt levels and falling revenue growth cost it two points. The stock, though, has done well, rising nearly 25% in the past year.
Beam is best known for its Jim Beam bourbon brand. But it also has a number of other whiskeys under its umbrella. Former parent Fortune Brands spun out Beam as part of its breakup into its component businesses in 2011.
Beam is a relatively small player in the liquor space. But even though Diageo (NYS: DEO) is about 10 times bigger than Beam, both players have been fairly successful with international expansion and growth. While Diageo has seen big growth in the Asian region, Beam's sales growth has come from across the globe, with Europe, South America, and the Asia-Pacific area all providing good results. That gives Beam a competitive advantage over rivals Brown-Forman (NYS: BF.B) and Constellation Brands (NYS: STZ) , which have had less success internationally.
Beam has also benefited from overall interest in premium brands. Even as Boston Beer (NYS: SAM) has had to deal with up-and-coming microbrewer competition, investors in spirits have gravitated toward ultra-premium beverages.
For Beam to improve, it needs to focus on building its brand awareness to crack into the upper echelons of the industry. If it can find a particular niche to dominate, then Beam could easily move closer to perfection in the years to come.
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.
Just as Beam is a small spirits player looking to get big, Boston Beer is a small brewer playing in the big leagues. Boston Beer's Sam Adams brand helped to redefine beer and kick off the craft beer revolution in the United States. Success breeds competition, though, and now Boston Beer faces a crowded field of craft beers. Can Boston Beer rise above the rest? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's risks and opportunities. Just click here now to find out whether Boston Beer is a buy today.
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The article Has Beam 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 Boston Beer. Motley Fool newsletter services recommend Beam, Diageo, and Boston Beer. 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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