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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock and then decide whether Boeing (NYSE: BA ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure that a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Boeing.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||4.0%||fail|
|1-Year Revenue Growth > 12%||6.2%||fail|
|Margins||Gross Margin > 35%||18.0%||fail|
|Net Margin > 15%||1.5%||fail|
|Balance Sheet||Debt to Equity < 50%||420.7%||fail|
|Current Ratio > 1.3||1.12||fail|
|Opportunities||Return on Equity > 15%||63.3%||pass|
|Valuation||Normalized P/E < 20||50.45||fail|
|Dividends||Current Yield > 2%||2.5%||pass|
|5-Year Dividend Growth > 10%||11.4%||pass|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Boeing's score of 3 doesn't look particularly impressive, let alone perfect. As a big player in a capital-intensive industry, Boeing faces some challenges that make it difficult to score well by these measures.
On the commercial-aircraft front, Boeing has run into years-long delays with both its 747-8 and 787 models. As consolidation in the airline industry continues, with United Continental's (NYSE: UAL ) merger now complete and Southwest (NYSE: LUV ) poised to buy AirTran, concerns rise over whether Boeing will retain its market share. Even if Southwest seems likely to stay all-Boeing, others have turned to smaller jets from Embraer (NYSE: ERJ ) for lower-traffic routes.
Meanwhile, Boeing's defense business remains vulnerable to the ever-present threat of government budget cuts. With far lower net margins and higher debt levels than competitors General Dynamics (NYSE: GD ) and Lockheed Martin (NYSE: LMT ) have, Boeing could be most vulnerable to any loss of business from the public sector. If that happens, even the company's attractive dividend -- which already exceeds its earnings over the past 12 months -- could potentially be at risk.
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.