Has Sanofi 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 and then decide whether Sanofi 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 Sanofi.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 4.2% | Fail |
1-year revenue growth > 12% | 2.6% | Fail | |
Margins | Gross margin > 35% | 69.1% | Pass |
Net margin > 15% | 13.8% | Fail | |
Balance sheet | Debt to equity < 50% | 25.3% | Pass |
Current ratio > 1.3 | 1.65 | Pass | |
Opportunities | Return on equity > 15% | 9% | Fail |
Valuation | Normalized P/E < 20 | 21.89 | Fail |
Dividends | Current yield > 2% | 3.5% | Pass |
5-year dividend growth > 10% | 6% | Fail | |
Total score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Sanofi last year, the company dropped two more points, adding to its one-point loss from 2011 to 2012. Falling net margins and a big rise in valuation has produced the score drop, but shareholders aren't complaining, as shares have risen by more than 30% in the past year.
Like many drugmakers, Sanofi has gone through the pains of the patent cliff, as generic competition has emerged against its Lovenox, Aprovel, and Plavix drugs. But recent approvals of cancer treatment Zaltrap and diabetes drug Lyxumia bode well for Sanofi's future. Zaltrap in particular, which Sanofi markets for Regeneron Pharmaceuticals , should be a big contributor to Sanofi's bottom line because under its deal with Regeneron, Sanofi will get to keep the lion's share of profits until it is reimbursed for half the costs of developing the drug.
What's going well for Sanofi is the extent of its pipeline. Unlike many companies that are highly dependent on blockbuster drugs, Sanofi has a well-diversified mix of drugs contributing to overall sales, and it also has made a big push on the clinical-trial level in recent years.
Sanofi has also identified some other promising growth areas. Human and animal vaccines have risen in significance at the company, with treatments for children's diseases as well as adult flu and animal diseases including rabies and foot-and-mouth disease. Sanofi has also done well in emerging markets, and its strategy of keeping all its segments under one roof has given it an advantage over Abbott Labs and its divisional split-up strategy by letting Sanofi retain its full breadth of offerings, helping it maximize its bargaining power in fast-growing markets.
Earlier this month, though, Sanofi and marketing partner Bristol-Myers Squibb disclosed some bad news on their Plavix drug, as Sanofi announced in an SEC filing that the U.S. Justice Department has been looking at what information was disclosed to the FDA regarding blood-thinning drug Plavix. The filing said that Sanofi has known about the investigation for nine months. The main threat would be a fine or other penalty, as sales of the off-patent drug have already plunged.
For Sanofi to improve, it needs to focus on restoring growth and get its margins back up. Once earnings start to catch back up with the share price, Sanofi should start getting closer to perfection once again.
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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The article Has Sanofi Become the Perfect Stock? originally appeared on Fool.com.
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