Is MKS Instruments 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 MKS Instruments (Nasdaq: MKSI  ) 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 MKS Instruments.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.1% Fail
  1-Year Revenue Growth > 12% 9.3% Fail
Margins Gross Margin > 35% 45.6% Pass
  Net Margin > 15% 16.4% Pass
Balance Sheet Debt to Equity < 50% 0.1% Pass
  Current Ratio > 1.3 10.25 Pass
Opportunities Return on Equity > 15% 15.9% Pass
Valuation Normalized P/E < 20 9.34 Pass
Dividends Current Yield > 2% 2.4% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; MKS Instruments started paying a dividend in May 2011. Total score = number of passes. 

With a score of 7, MKS Instruments comes quite close to perfection. Except for the company's lackluster growth in recent years, investors couldn't ask much more from MKS. 

MKS sells components to semiconductor equipment manufacturers, such as Applied Materials (Nasdaq: AMAT  ) , Lam Research (Nasdaq: LRCX  ) , and Novellus (Nasdaq: NVLS  ) . After having suffered during the big hit that the semiconductor industry took in 2009, the company recovered strongly last year, more than doubling its revenue in 2010 and dumping a couple of unprofitable businesses. 

The challenge for MKS, though, is in navigating the cyclical nature of its industry. In the second quarter of 2011, for instance, MKS announced a big beat in earnings but suggested that its third-quarter results would be far lower than expected. Fast-forward to earlier this week, when the company announced those third-quarter earnings, and they came in 45% higher than earlier forecast -- yet shares plunged because MKS again forecast weak guidance for the next quarter. 

Unfortunately, MKS competitors Brooks Automation (Nasdaq: BRKS  ) and Advanced Energy Industries (Nasdaq: AEIS  ) both have higher returns on equity despite having somewhat lower earnings multiples. That doesn't mean that MKS can't become a perfect stock -- but in order to do so, it'll have to start demonstrating its superiority over its peers and hope for a strong economic recovery to boost the entire semiconductor industry. 

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 MKS Instruments 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. 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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