Is RealD 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 RealD (NYSE: RLD  ) 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 RealD.

 

Factor

 

What We Want to See

 

Actual

 

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

89.6%

Pass

 

1-Year Revenue Growth > 12%

27.7%

Pass

Margins

Gross Margin > 35%

35.8%

Pass

 

Net Margin > 15%

(2.7%)

Fail

Balance Sheet

Debt to Equity < 50%

16.9%

Pass

 

Current Ratio > 1.3

1.02

Fail

Opportunities

Return on Equity > 15%

(11.9%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

 

 

 

 

 

Total Score

 

4 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful. Total score = number of passes.

With only four points, RealD isn't giving investors the 3-D blockbuster financial performance they'd like to see. The company has grown quickly, but many fear that the novelty of 3-D technology might prove to be more of a fad than a lasting change in the way people watch entertainment.

There's no doubt that the popularity of 3-D technology is still near its peak. In July, RealD got orders from AMC for 1,000 screens and Cinemark (NYSE: CNK  ) for up to 1,500. Competitor IMAX (NYSE: IMAX  ) is also building huge numbers of screens around the world. With both Time Warner (NYSE: TWX  ) and Disney (NYSE: DIS  ) seeing increasing demand for 3-D versions of its biggest blockbuster movies, it seems like the perfect time for RealD to take advantage of the hot trend.

Unfortunately, the company hasn't been able to cash in on its popularity. In its most recent quarter, the company actually saw revenue drop from year-ago levels, despite posting a higher-than-expected profit. Meanwhile, companies like Panasonic (NYSE: PC  ) , Sony (NYSE: SNE  ) , and Samsung that have been producing 3-D TVs have seen much slower adoption rates than some had hoped.

For RealD to thrive, 3-D has to get past the early adopter stage to get to mainstream success. That's far from a certainty right now, but if it happens, then RealD could pop up toward perfection quickly.

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 RealD 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. Motley Fool newsletter services have recommended buying shares of Walt Disney and IMAX. 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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