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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 if Pitney Bowes (NYSE: PBI ) 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 Pitney Bowes.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.5%||fail|
|1-Year Revenue Growth > 12%||(3.9%)||fail|
|Margins||Gross Margin > 35%||50.9%||pass|
|Net Margin > 15%||6%||fail|
|Balance Sheet||Debt to Equity < 50%||NM||fail|
|Current Ratio > 1.3||1.17||fail|
|Opportunities||Return on Equity > 15%||NM||fail|
|Valuation||Normalized P/E < 20||11.07||pass|
|Dividends||Current Yield > 2%||6.1%||pass|
|5-Year Dividend Growth > 10%||3.3%||fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Pitney Bowes had negative or negligible shareholder equity during the periods in question. Total score = number of passes.
Pitney Bowes can only muster a score of 3. But with its core business in a declining area, that shouldn't come as a major surprise to investors.
Pitney Bowes is best known as the leader of equipment to help businesses manage their mailing needs. From its postage meters to scales and shipping equipment, Pitney Bowes once dominated office mailrooms with its cost-saving devices. That dominance has led the company to a place on the coveted Dividend Aristocrats list, as shareholders have enjoyed rising dividends for 28 consecutive years.
But just as buggy-whip makers suffered from the rise of the automobile, Pitney Bowes has had to reinvent itself as companies move away from snail mail toward electronic solutions. Online competitor Stamps.com (Nasdaq: STMP ) has emerged as an alternative to Pitney Bowes' bricks-and-mortar machines.
Yet Pitney Bowes hasn't given up. As the U.S. Postal Service has fallen from its position of strength, Pitney Bowes has made deals with FedEx (NYSE: FDX ) and UPS (NYSE: UPS ) to include services for their customers as well. However, some of Pitney Bowes' initiatives have pushed it into the realm of more generalized office services, where numerous competitors such as Xerox (NYSE: XRX ) have a more entrenched presence.
For now, Pitney Bowes has the signs of a long-lived company falling into obscurity. Its dividend strength has earned it loyalty from shareholders, but if the company can't change with the times, its stock won't get you close to perfect anytime soon.
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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