Is TAL International 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 TAL International (NYSE: TAL  ) 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 TAL International.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.1% Fail
  1-Year Revenue Growth > 12% 40.9% Pass
Margins Gross Margin > 35% 86.6% Pass
  Net Margin > 15% 21.2% Pass
Balance Sheet Debt to Equity < 50% 411.1% Fail
  Current Ratio > 1.3 2.13 Pass
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 17.08 Pass
Dividends Current Yield > 2% 5.4% Pass
  5-Year Dividend Growth > 10% 34.6% Pass
       
  Total Score   8 out of 10

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

With eight points, TAL International comes pretty close to perfection. The company isn't in the most glamorous business, but the money it makes pretty much speaks for itself.

TAL sells and leases containers that get used worldwide for various forms of transportation. Its dry freight containers are used for ordinary types of cargo, while it also produces refrigerated containers, tank containers, and other customized containers for specialized uses.

Many shipping-related companies have suffered greatly recently. Dry bulk shippers DryShips (Nasdaq: DRYS  ) and Diana Shipping (NYSE: DSX  ) have seen their charter rates fall dramatically as the Baltic Dry Index has remained at relatively low levels. Among tanker stocks, Frontline (NYSE: FRO  ) in particular has faced a recent cash crisis, while Ship Finance International (NYSE: SFL  ) is one of many companies that stands to have to deal with potential collateral damage from Frontline's woes. In general, a glut of ships and lackluster demand could leave the industry struggling for a while.

Despite bad conditions among shipping stocks, TAL has been having great results. For its most recent quarter, sales jumped 29% with earnings falling slightly but coming in better than estimated. It also raised its dividend for the sixth time in two years after having to cut its payout dramatically during the financial crisis. Investors rewarded the stock with a 10% jump.

Given the leveraged nature of its business, TAL is unlikely ever to reach a perfect 10. But as long as it can ride an extremely profitable business model to gains, investors shouldn't quibble about the stock falling short by a point or two.

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.

TAL International has a lot of promise, but it's not the only great stock out there. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add TAL International 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. 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 (1) | Recommend This Article (4)

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  • Report this Comment On February 15, 2012, at 12:50 PM, dpower7591 wrote:

    TAL is very strong in the realm of fundamental analysis and value purchasing. For 1-5 year hold TAL should enrich stable growth in ones portfolio.

    A point I would like to make is out of the 8 of 10 passes the two fails in my eyes do not show an undervalue in the stock.

    My reasons being is that one, the company is relatively new and their 5 year revenue average needs to take into consideration the starting years of generally any new company where revenue growth is slow after the years of inception. The last years substantial revenue growth shadows the 5 year average, and symbolizes the future and not the distant past. Two, even though the company shows a higher debt ratio, it is normal for any new company especially with such a large asset base (to purchase more capital) to show degree of debt. Strong ROIC and margins I believe makes up for this and string recent rates of growth.

    Taking this in account, TAL can be judged as near perfect stock by the criteria in my first paragraph.

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