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 Pilgrim's Pride (NYS: PPC) 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 Pilgrim's.
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%
1 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Pilgrim's last year, the company has had its score cut in half. Despite becoming profitable, revenue growth has fizzled. The stock, though, has given shareholders a nice bump, rising 25% over the past year.
For a long time, Pilgrim's has been part of a big battle in the chicken industry. With Tyson Foods (NYS: TSN) , Sanderson Farms (NAS: SAFM) , and Pilgrim's all having ramped up production, the cyclical nature of the business sent prices plunging, putting pressure on profitability throughout the industry. Imports from Brasil Foods (NYS: BRFS) also didn't help the supply and demand dynamics.
More recently, though, Pilgrim's and its peers finally started to cut back on capacity. Now, pricing levels have gotten into line, which has been a big part of why Pilgrim's bottom line is back in the black. Moreover, with economic uncertainty continuing, cost-conscious families may once again start using more chicken while cutting back on more expensive types of meat -- especially if the reports of mad cow disease from earlier this year persist.
Still, Pilgrim's problems aren't over yet. The drought in the U.S. has caused expectations of increased costs for feed, which could again push profits down. But as long as chicken prices stay relatively high, Pilgrim's has a better chance of weathering the storm than it once had.
For better or worse, Pilgrim's has chosen to concentrate on its poultry production. The company sold off its egg-production operations to egg specialist Cal-Maine Foods (NAS: CALM) , leaving it more focused on meat production.
For Pilgrim's to improve, it needs to continue to find ways to get debt paid down and to boost margins and growth. Even so, the low-margin nature of the business makes it a long shot for Pilgrim's to get close to perfection in the near future.
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.
To learn about a stock we think has better prospects than Pilgrim's for 2013, find out which stock the Motley Fool's chief investment officer has selected his No. 1 stock for the next year. You can read all about it in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.
Click here to add Pilgrim's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Pilgrim's Pride 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 Sanderson Farms. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.