Has St. Jude Medical Become 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 St. Jude Medical (NYSE: STJ  ) 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 St. Jude Medical.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.5% Fail
  1-Year Revenue Growth > 12% 10.7% Fail
Margins Gross Margin > 35% 73.9% Pass
  Net Margin > 15% 16.3% Pass
Balance Sheet Debt to Equity < 50% 67.7% Fail
  Current Ratio > 1.3 3.44 Pass
Opportunities Return on Equity > 15% 21% Pass
Valuation Normalized P/E < 20 14.83 Pass
Dividends Current Yield > 2% 2.3% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   6 out of 9

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

Since we looked at St. Jude Medical last year, the company has kept its six-point score. Starting a dividend was a promising sign, although a rise in debt took the point away again.

St. Jude specializes in medical devices having to do with the human heart. With products to manage heart rhythm, repair heart valves, and provide atrial fibrillation, St. Jude sells its wares around the world, with roughly half of its sales coming from international markets.

Last week, St. Jude gave preliminary results for its fourth quarter. With a 4% jump in sales, the company said it felt comfortable with previous guidance for earnings of between $0.83 and $0.85 per share. However, the climate for medical devices has been hit-or-miss, with a weak economy creating some soft pockets for revenue at times.

St. Jude also faces significant competition from a select group of companies. Medtronic (NYSE: MDT  ) has developed new devices that have allowed its stock to dramatically outperform St. Jude in recent months. Boston Scientific (NYSE: BSX  ) has struggled along with St. Jude but will fight hard for its share of the device business.

In addition, a dispute with micro-cap Kensey Nash (Nasdaq: KNSY  ) regarding royalties for its Angio-Seal device could be nearing resolution. The companies agreed to nonbinding mediation to try to resolve the dispute.

St. Jude took a big step toward perfection when it initiated a big dividend in early 2011. Its 2%-plus payout vaulted it ahead of rival Stryker (NYSE: SYK  ) , even after its own recent bump-up for its dividend. To keep improving, though, St. Jude needs stronger sales growth and should work on keeping its debt under control.

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 the best investments from the rest.

St. Jude may not be the perfect stock. But if you'd like to get some ideas for great stocks you can stick with for the long haul, we've got just the thing for you. Please accept my invitation to read the Fool's latest special report. Inside, you'll find revealed three stocks to help you retire rich. It's absolutely free, but it won't be around forever, so click here and read it today.

Click here to add St. Jude Medical to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of St. Jude Medical and Medtronic. Motley Fool newsletter services have recommended buying shares of Stryker. 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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