Is International Game Technology 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, then decide if International Game Technology (NYSE: IGT  ) 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.
  • Money-making 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 International Game Technology.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (4.5%) Fail
  1-Year Revenue Growth > 12% (4.3%) Fail
Margins Gross Margin > 35% 57.7% Pass
  Net Margin > 15% 13.1% Fail
Balance Sheet Debt to Equity < 50% 111.9% Fail
  Current Ratio > 1.3 2.44 Pass
Opportunities Return on Equity > 15% 21.1% Pass
Valuation Normalized P/E < 20 19.10 Pass
Dividends Current Yield > 2% 1.5% Fail
  5-Year Dividend Growth > 10% (13.5%) Fail
       
  Total Score   4 out of 10

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

International Game Technology's score of 4 isn't going to win any games. After getting hit hard by a struggling casino industry, the game maker has had to pull itself back up by its bootstraps.

When it comes to slot machines, IGT is on the cutting edge. The company is largely behind the revolution in electronic slots, including the networked progressive jackpot systems that create the potential for million-dollar payouts.

As you'd expect, IGT's core business makes it vulnerable to fluctuations in the fortunes of casino operators. During the financial crisis, Las Vegas Sands (NYSE: LVS  ) and MGM Resorts (NYSE: MGM  ) found themselves on the brink of bankruptcy as Las Vegas traffic slowed to a standstill. Even competitor Wynn Resorts (Nasdaq: WYNN  ) saw its stock plummet in the face of the recession.

What saved casinos, though, was Macau; as a major supplier, IGT has had to follow suit. Like card machine maker Shuffle Master (Nasdaq: SHFL  ) , IGT now gets a substantial part of its revenue abroad -- 28% in 2010. As a result, the company recently raised its earnings guidance. And with even Las Vegas suggesting that signs of growth may be near, prospects are looking better for the company.

Granted, IGT is far from a sure bet. Games go in and out of style quickly, and the company has to defend its territory diligently. But the company has led its industry for a long time, and having survived one of the toughest periods in its history, it could be time for IGT investors to hit the jackpot.

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 International Game Technology to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of IGT. 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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