Is Fortune Brands 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 whether Fortune Brands (NYSE: FO  ) 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 Fortune Brands.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 0.5% fail
  1-Year Revenue Growth > 12% 5.6% fail
Margins Gross Margin > 35% 43.9% pass
  Net Margin > 15% 6.3% fail
Balance Sheet Debt to Equity < 50% 77.2% fail
  Current Ratio > 1.3 2.06 pass
Opportunities Return on Equity > 15% 7.8% fail
Valuation Normalized P/E < 20 25.26 fail
Dividends Current Yield > 2% 1.2% fail
  5-Year Dividend Growth > 10% (10.9%) fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 2, it appears things couldn't get much further from perfect for Fortune Brands. But an encouraging recent move could finally be the beginning of the end of bad times at the company.

Fortune Brands is a conglomerate of diverse businesses, producing products ranging from Jim Beam bourbon to Titleist golf balls and Moen faucets. But being in all of those businesses means focusing on none of them, which has left the company at some competitive disadvantages. Unlike fellow spirits makers Diageo (NYSE: DEO  ) and Brown-Forman (NYSE: BF-B  ) , which have enjoyed strong returns on equity and steadily increasing dividends, Fortune had to cut its dividend last year in the aftermath of the financial crisis. Even worse, just as competitors Callaway Golf (NYSE: ELY  ) and fixture maker Masco (NYSE: MAS  ) have struggled, Fortune's golf and home businesses have seen big contractions in sales and profits from precrisis levels.

But interest from activist investor Bill Ackman and his Pershing Square hedge fund has helped renew hope for the company. Perhaps in response to Ackman's purchase of a stake in the company, Fortune announced yesterday that it would split itself into three companies. That move may help the market price the stock more easily, since comparisons with other single-line businesses will be simpler. And more importantly for investors, it will allow each company to focus on what it does best, potentially unlocking shareholder value in the process.

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 Fortune Brands 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. Fortune Brands is a Motley Fool Stock Advisor pick. Diageo and Masco are Motley Fool Income Investor picks. The Fool owns shares of Diageo. 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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