Is TiVo the Perfect Stock?

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 if TiVo (Nasdaq: TIVO  ) 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. 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 don't mean anything if a company can't turn them into profits. Strong margins ensure 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 TiVo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.3% fail
  1-Year Revenue Growth > 12% 0.6% fail
Margins Gross Margin > 35% 43.7% pass
  Net Margin > 15% (19.7%) fail
Balance Sheet Debt to Equity < 50% 0.0% pass
  Current Ratio > 1.3 3.71 pass
Opportunities Return on Equity > 15% (23.6%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0.0% fail
  5-Year Dividend Growth > 10% 0.0% fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; TiVo had negative earnings during the period. Total score = number of passes.

With a score of 3, you might think TiVo isn't worth a closer look. But once the legal uncertainty that's been plaguing the company for years comes to an end, investors may frantically want to hit the rewind button.

TiVo is famous for its digital video recording technology that lets you save TV programs to watch later. In addition to offering its own boxes, TiVo has licensed its technology to cable company Comcast (Nasdaq: CMCSA  ) and satellite provider DirecTV (Nasdaq: DTV  ) .

But EchoStar (Nasdaq: SATS  ) , the original parent of Dish Network (Nasdaq: DISH  ) , didn't play ball, opting instead to market its own DVR. Earlier this year, an appeals court affirmed a previous decision finding EchoStar and Dish in contempt for violating TiVo's patents, potentially opening the door to damages of $300 million or more. The legal battle continues, and TiVo's stock surges and falls based on the latest moves in the case.

Given the magnitude of the case for TiVo, it's hard to judge the company based on its financials. The company has only turned a profit once, in fiscal 2009, and that gain came only from a previous legal settlement and the accompanying interest. Once the company finally gets its legal battles behind it, it can then turn its attention back to reaching for perfection.

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.

Click here to add TiVo to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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 Fool has a disclosure policy.

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  • Report this Comment On November 19, 2010, at 4:56 PM, DukeGuy wrote:

    Is this a joke? TIVO is about as far from a perfect stock as one can get! As the article points out, they've only turned a profit once. However, this isn't solely because of legal issues (as the article suggests). It's becasue Tivo is and always has lost money on producing Tivo Boxes! And it's only going to get worse with the new price change to $20.00 a month! Pop Quiz: When a company loses money on selling a product and relies on subscriber retention as its model it shoud:

    A: make the box more expensive, make it way better than DVR, and carry a small (2-8 dollar) subscription premium; thus making the consumer vested and likely not to switch for a couple years.

    OR B: Make the box cheaper; causing even heavier reliance on low subscriber turnover, and then make the subscription 3-4 times more expensive than viable supplements (10-15 dollars)

    99.999% of the world would choose option A as superior. However, TIVO has chosen option B.

    They have a strategy that MUST have low turnover... but then they've lowered the acquisition cost AND raised subscription premiums; both of which encourage turnover!!!

    If Tivo figures this out and stops making the darn box they can be really profitable as a tech licensing business. They even have enough leverage to keep brand power by forcing Comcast to put "Tivo" on their box. Then they may actually be the "perfect stock".

    Right now they're just a below-average company with an average product and a bad strategy. This may be a $20 stock someday, but it'll be a $5 stock long before that day comes.

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