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 Hillenbrand (NYSE: HI ) 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 Hillenbrand.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.7%||Fail|
|1-Year Revenue Growth > 12%||13.2%||Pass|
|Margins||Gross Margin > 35%||41.5%||Pass|
|Net Margin > 15%||12.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||94.1%||Fail|
|Current Ratio > 1.3||3.18||Pass|
|Opportunities||Return on Equity > 15%||25.7%||Pass|
|Valuation||Normalized P/E < 20||14.51||Pass|
|Dividends||Current Yield > 2%||3.4%||Pass|
|5-Year Dividend Growth > 10%||1.3%*||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes. * Four-year growth rate.
Since we looked at Hillenbrand last year, the company has kept its six-point score. The company's growth has slowed down a bit, but it's still doing a good job staying profitable and keeping margins up.
Hillenbrand is a big player in the death-services industry, with 50% market share in the U.S. for providing caskets. Although a surprising number of different companies compete in this area, Hillenbrand has been performing the best. Both Service Corp. International (NYSE: SCI ) and Stewart Enterprises (Nasdaq: STEI ) lag well behind on returns on equity, as competition from big-box retailers has taken away some of their customer base. Matthews International (Nasdaq: MATW ) has had to turn to the international side of its business to try to bolster its growth prospects.
What sets Hillenbrand apart from the competition is the way that it has built up the other side of its business: industrial machinery. Its process-equipment group includes conveyor belts and other machines that move items through the production process, as well as sorting and sifting equipment that makes sure each product goes where it's supposed to go. This is the area of the business that has the most growth potential, as the prospects for overseas expansion are higher here.
For Hillenbrand to keep improving, continuing on its path toward a more diversified business may be the best move. Its dividend yield already stands above most of its peers in the industry, with only cemetery operator StoneMor Partners (NYSE: STON ) posting a substantially higher payout because of its limited partnership status. With solid growth to boot, Hillenbrand already gives investors much of what they like to see in a stock.
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.
Hillenbrand isn't 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 Hillenbrand to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.