Is Insituform Technologies 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 Insituform Technologies (Nasdaq: INSU  ) 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 Insituform Technologies.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

9.0%

Fail

 

1-Year Revenue Growth > 12%

9.0%

Fail

Margins

Gross Margin > 35%

22.7%

Fail

 

Net Margin > 15%

5.1%

Fail

Balance Sheet

Debt to Equity < 50%

19%

Pass

 

Current Ratio > 1.3

2.91

Pass

Opportunities

Return on Equity > 15%

7.9%

Fail

Valuation

Normalized P/E < 20

14.55

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

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

With a score of 3, Insituform Technologies doesn't look like it's headed for perfection anytime soon. The infrastructure company seems to be in the right place at the right time, but lately, its earnings guidance has come under question from analysts.

Insituform is an unusual company that does a tough job: keeping the pipes that deliver water and energy in good working order. Using the company's technology, utilities and municipal governments can repair damaged underground pipes without digging trenches and causing big disruptions. That's bad news for new-pipe makers ranging from giants U.S. Steel (NYSE: X  ) and Tenaris (NYSE: TS  ) to smaller companies like Northwest Pipe (Nasdaq: NWPX  ) . But with the EPA's Office of Water Management reporting that fixing water and sewer pipes could cost more than $33 billion, Insituform has plenty of potential business going forward.

Unfortunately, local governments aren't exactly flush with cash these days, so any company that depends on municipal spending is at risk. But because money for water and sewer often comes from dedicated fees rather than general funds, Insituform isn't as exposed to municipal budget cuts as companies like trash haulers Waste Management (NYSE: WM  ) and Republic Services (NYSE: RSG  ) .

Yesterday, Insituform shares dropped 6% as Oppenheimer downgraded the shares from perform to underperform. The downgrade cited "highly aggressive" guidance that could result in disappointing results going forward. Yet the stock's drop only underlines the cheap valuation for Insituform shares.

Insituform clearly makes a timely investing play. Even if short-term pressures keep the stock cheap, the potential need for future infrastructure improvements makes it more likely that Insituform will make its way closer to perfection in the years ahead.

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 Insituform Technologies 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. The Motley Fool owns shares of Waste Management and Insituform Technologies. Motley Fool newsletter services have recommended buying shares of Waste Management and Republic Services, as well as writing a covered strangle position in Waste Management. 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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 15, 2011, at 12:15 PM, hanover67 wrote:

    I think INSU is a good long-term investment, and that its "fails" are the result of the current environment. The question is how long? Will it have the resources to allow it to be in the right place at the right time when its services are needed?

    Its cash and liquidity and growth level in a bad economy are strengths, and the lack of a dividend is actually a plus, as it re-invests cash in the business. Margins could be better and sales could be higher, and that may well happen. Both require the stockholder's patience to reap the rewards down the road.

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