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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 Toyota Motor (NYSE: TM ) 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 Toyota Motor.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(5.6%)||Fail|
|1-year revenue growth > 12%||(10.7%)||Fail|
|Margins||Gross margin > 35%||13.8%||Fail|
|Net margin > 15%||1.1%||Fail|
|Balance sheet||Debt to equity < 50%||110.3%||Fail|
|Current ratio > 1.3||1.02||Fail|
|Opportunities||Return on equity > 15%||2.2%||Fail|
|Valuation||Normalized P/E < 20||40.44||Fail|
|Dividends||Current yield > 2%||1.5%||Fail|
|5-year dividend growth > 10%||(19.7%)||Fail|
|Total Score||0 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Toyota Motor last year, the company has lost its final two points. The Japanese earthquake and tsunami in early 2011 and other natural disasters since took a big toll on the business, and it's not yet clear how the automaker will move forward to recapture its lost momentum.
Toyota has had a bad year. The earthquake slammed its production capacity, putting a big wrench in its supply chain and causing a huge drop in its profits immediately following the disaster. Yet later in the year, flooding in Thailand hurt both production facilities and parts manufacturers in the Southeast Asian nation, further hampering Toyota's recovery.
Although Honda (NYSE: HMC ) has shared many of Toyota's woes, the rest of the industry seems to be moving full speed ahead. Ford (NYSE: F ) suffered some minor damage in Thailand, but its net income for the year far exceeded Toyota's, despite Ford's being smaller than its Japanese rival. Meanwhile, Tata Motors (NYSE: TTM ) also took a hit in Thailand but is challenging Toyota's attempt to become the dominant player throughout Asia, while General Motors (NYSE: GM ) has continued to make inroads into the hard-to-crack Chinese auto market.
The big question for Toyota remains whether it will insist on keeping market share high, or whether it will accept lower share in exchange for wider margins. So far, the company seems to be pursuing share at any cost, which isn't necessarily the best answer for investors.
Toyota has started to see sales numbers in the U.S. recover, which should make for at least some boost to its goose-egg score. But for Toyota to get a lot closer to perfection, it needs not only to get past disaster-driven production problems but also the nagging concerns about quality and safety that plagued the automaker even before the earthquake.
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.
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