Is Quad/Graphics 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 Quad/Graphics (NYSE: QUAD  ) 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 Quad/Graphics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.9%* Pass
  1-Year Revenue Growth > 12% 87.5% Pass
Margins Gross Margin > 35% 23.4% Fail
  Net Margin > 15% (0.3%) Fail
Balance Sheet Debt to Equity < 50% 118.8% Fail
  Current Ratio > 1.3 1.44 Pass
Opportunities Return on Equity > 15% 0.5% Fail
Valuation Normalized P/E < 20 5.70 Pass
Dividends Current Yield > 2% 5.6% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful; Quad/Graphics started paying a dividend in May 2011. *3.75-year growth rate. Total score = number of passes.

With five points, Quad/Graphics prints up a reasonable score. The company's stock has been on a roller-coaster ride of late, as investors try to weigh whether the company has growth potential or is doomed to join buggy-whip makers and other obsolescent technology.

Quad/Graphics specializes in providing print services to businesses. In an era in which digital distribution has made hard copy out of style, the entire print industry has struggled. Quad/Graphics has had to fight back against initiatives from R.R. Donnelley (Nasdaq: RRD  ) and its interactive print business, but both companies, as well as Cenveo (NYSE: CVO  ) , Consolidated Graphics (NYSE: CGX  ) , and Vistaprint (Nasdaq: VPRT  ) , have had their own obstacles to overcome.

Investors seem to have a lot of mixed feelings about Quad/Graphics. On one hand, hedge fund manager John Paulson continues to have confidence in the stock, holding onto his million-share position in the company throughout the third quarter. Yet just last week, Quad/Graphics lost a quarter of its value when its earnings fell short of expectations. It also issued negative guidance for the remainder of the year.

Perhaps the strangest thing about the company is that it initiated a huge dividend earlier this year even while it has been losing money. That makes its yield appealing to investors, but without the earnings to back it up, it's simply not sustainable. Combined with the company's debt load, Quad/Graphics needs to figure out how to turn its revenue into profits in a hurry -- or else it will fade away from perfection slowly but surely.

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 Quad/Graphics 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. Motley Fool newsletter services have recommended buying shares of Vistaprint. The Motley Fool owns shares of Vistaprint. 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.


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

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 November 18, 2011, at 8:17 AM, snoopdogDaRock wrote:

    Why would anyone want to buy Quad Graphic stock. It has dropped about 30 dollars in the last year. This is last generation printing. Digital printing is on it's way up printing presses are on there way down. Why are we still killing trees to print the trash they print anyway. I say Quad has seen it's better days.

  • Report this Comment On November 21, 2011, at 5:35 PM, prginww wrote:

    Okay--

    Buggy whip biz--purchased tired missed managed Quebecor World assets-- Plus Quad purchasing Quebecor was like the Cleavers adopting foster children.

    There was very little synergy--(closing plants is not synergistic--just a cost item) negative return on investment

    Purchasing synergies-after 20 years--what's left to squeeze out of the same suppliers-not much--

    Looks like the whole "going public" was a financial strategy that left the investors holding the bag.

    Quad needs to dump the business that the do not have a number one or 2 position in market share.

    Quad management is solid-however this task is to daunting for the boys from Wisconsin-

    Look for sale in late 2012.

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Related Tickers

11/26/2014 4:02 PM
QUAD $21.88 Down -0.02 -0.09%
Quad/Graphics, Inc… CAPS Rating: **
CGX $0.00 Down +0.00 +0.00%
Consolidated Graph… CAPS Rating: *****
CMPR $67.55 Up +0.72 +1.08%
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CVO $1.89 Down -0.03 -1.56%
Cenveo, Inc. CAPS Rating: **
RRD $16.86 Up +0.08 +0.45%
R.R. Donnelley & S… CAPS Rating: ***

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