Is Pentair 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 Pentair (NYSE: PNR  ) 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 Pentair.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.7% Fail
  1-Year Revenue Growth > 12% 14.1% Pass
Margins Gross Margin > 35% 31.1% Fail
  Net Margin > 15% 1.0% Fail
Balance Sheet Debt to Equity < 50% 63.9% Fail
  Current Ratio > 1.3 1.93 Pass
Opportunities Return on Equity > 15% 1.8% Fail
Valuation Normalized P/E < 20 22.18 Fail
Dividends Current Yield > 2% 1.9% Fail
  5-Year Dividend Growth > 10% 7.4% Fail
       
  Total Score   2 out of 10

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

With just two points, Pentair doesn't seem to have much going for it. But the company recently attracted the attention of a big conglomerate, and the resulting partnership could change the way Pentair does business.

Pentair specializes in water and fluid systems, with products that range from commercial pumps and water treatment systems to pool accessories. It also makes protective housings for electronics and other sensitive equipment.

The water industry has become increasingly interesting as an investment play. With areas of the western U.S. continuing to see populations rise despite limited water resources, utilities American States Water (NYSE: AWR  ) and California Water Service (NYSE: CWT  ) are striving to keep up with demand. Meanwhile, around the world, water treatment has become essential, with Veolia Environnement (NYSE: VE  ) and other international players vying to capitalize on growth opportunities. Pentair makes an interesting play in the space because its products are useful no matter who provides the actual water.

Earlier this week, Pentair captured the interest of a huge conglomerate. The company said that it would combine with part of Tyco International (NYSE: TYC  ) , taking over Tyco's flow-control business. With Tyco trying to divest itself of non-core businesses, Pentair believes the deal will immediately boost earnings substantially. Shares popped 14% on the news, but the partnership could be even more lucrative for Pentair in the long run.

The deal with Tyco could be exactly what Pentair needs to reach the next level. With the opportunity for faster revenue growth, better margins, and more profits, Pentair could easily get a lot closer to perfection in the years to come.

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.

Pentair may not be the perfect stock, but we've got some ideas you may like better. 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 Pentair 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 California Water Service Group. Motley Fool newsletter services have recommended buying shares of California Water Service Group and Veolia Environnement. 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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