Is Perrigo the Perfect Stock for 2012?

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 Perrigo (Nasdaq: PRGO  ) 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 Perrigo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 15.4% Pass
  1-Year Revenue Growth > 12% 19.2% Pass
Margins Gross Margin > 35% 34.7% Fail
  Net Margin > 15% 11.8% Fail
Balance Sheet Debt to Equity < 50% 78.6% Fail
  Current Ratio > 1.3 2.09 Pass
Opportunities Return on Equity > 15% 24.5% Pass
Valuation Normalized P/E < 20 30.43 Fail
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% 10.4% Pass
       
  Total Score   5 out of 10

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

With a score of 5, Perrigo lands in the middle of our scale. The health-care and nutrition company has posted some strong growth in recent years, but its current stock price leaves little margin for error.

As a maker of generic drugs, Perrigo is every big-pharma company's worst nightmare. Unlike companies like Merck and Bristol-Myers Squibb, Perrigo actually benefits from other companies' patent cliffs; expiring patent protection makes new compounds available for cheaper generic versions that Perrigo makes. Johnson & Johnson (NYSE: JNJ  ) has been particularly vulnerable to Perrigo's over-the-counter generics as J&J has dealt with wave after wave of recalls that have eroded consumer confidence in the consumer giant.

What makes Perrigo particularly impressive is its wide network of distribution channels. Walgreen (NYSE: WAG  ) , CVS Caremark (NYSE: CVS  ) , and Rite Aid (NYSE: RAD  ) all have arrangements to distribute Perrigo's products. The move doesn't just help Perrigo; by effectively outsourcing the production of generic over-the-counter drugs, the drug retailers are able to pass off liability concerns stemming from possible recalls onto Perrigo's shoulders. That cuts the drugstore chains' risk, but it also gives Perrigo a relatively recession-proof business.

Unfortunately, investors are paying up for a stock that pays next to no dividend. In order for Perrigo to advance toward perfection, it needs to grow into its valuation, take care of some debt, and treat shareholders better with a higher payout. With big patent expirations coming up, though, the next few years will be a crucial opportunity for Perrigo.

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 Perrigo 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 Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Johnson & Johnson. 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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