Is DigitalGlobe 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 DigitalGlobe (NYSE: DGI  ) 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 DigitalGlobe.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 27.9% Pass
  1-Year Revenue Growth > 12% 6.6% Fail
Margins Gross Margin > 35% 85.2% Pass
  Net Margin > 15% 0.3% Fail
Balance Sheet Debt to Equity < 50% 68.1% Fail
  Current Ratio > 1.3 2.85 Pass
Opportunities Return on Equity > 15% 0.2% Fail
Valuation Normalized P/E < 20 240.14 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only 3 points, DigitalGlobe isn't getting investors where they want to go. The satellite-imagery company gained note when surveillance pictures helped the U.S. military find Osama bin Laden, but slowing growth has many shareholders concerned about the company's future.

DigitalGlobe provides satellite images for both military and commercial purposes. Known for working with Google (Nasdaq: GOOG  ) on its Google Maps and Google Earth products, DigitalGlobe moved on to make agreements with companies including Nokia (NYSE: NOK  ) and Oracle (Nasdaq: ORCL  ) . Late last year, the company announced a deal with China Mobile (NYSE: CHL  ) to supply imagery for smartphone navigation to the Chinese telecom. But DigitalGlobe relies on its defense and intelligence segment for nearly 80% of its revenue.

The latest quarter has been a tough one for the industry. Both DigitalGlobe and archrival GeoEye (Nasdaq: GEOY  ) missed earnings estimates, although DigitalGlobe at least managed to give investors a more favorable future outlook than GeoEye did.

Going forward, the main question for both DigitalGlobe and GeoEye is how they can continue to improve their products to keep government and commercial customers interested. Any company that relies on defense-related spending is cowering in fear of potential budget cuts, but DigitalGlobe's intelligence specialty is an essential component for national security. If it can advance to higher-resolution imagery, then DigitalGlobe could get a lot 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.

Add DigitalGlobe 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 Google, Oracle, and China Mobile. Motley Fool newsletter services have recommended buying shares of GeoEye, Google, and China Mobile. We Fools don't 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.


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

DocumentId: 1583701, ~/Articles/ArticleHandler.aspx, 7/29/2014 11:00:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement