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 Manitowoc (NYSE: MTW ) 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 Manitowoc.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.6%||Fail|
|1-Year Revenue Growth > 12%||16.2%||Pass|
|Margins||Gross Margin > 35%||22.9%||Fail|
|Net Margin > 15%||(0.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||401.2%||Fail|
|Current Ratio > 1.3||1.12||Fail|
|Opportunities||Return on Equity > 15%||4.4%||Fail|
|Valuation||Normalized P/E < 20||42.94||Fail|
|Dividends||Current Yield > 2%||0.5%||Fail|
|5-Year Dividend Growth > 10%||2.7%||Fail|
|Total Score||1 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Manitowoc last year, the company has managed to pick up a single point. Even with faster revenue growth, though, the company still hasn't been able to deliver good financial results, and the stock's poor performance in the past year confirms that assessment.
Manitowoc has two very different businesses under its roof: crane construction and food-service equipment. With Caterpillar (NYSE: CAT ) having executed on expansion plans in China and Joy Global (NYSE: JOY ) benefiting from increased interest in mining equipment, the construction industry has been extremely strong in emerging markets -- despite some concerns about future growth.
But Manitowoc hasn't enjoyed all the benefits of emerging-market growth because it's concentrated on North America and Europe. With Europe's troubles holding the company back, Manitowoc would like to expand in emerging markets, with plans to build up in Brazil and China. But its already extended balance sheet makes those plans risky.
Another way that Manitowoc could benefit emerging markets is through its food-service customers. Both Yum! Brands (NYSE: YUM ) and McDonald's (NYSE: MCD ) are on Manitowoc's customer list, and as those two fast-food giants expand in China and elsewhere, Manitowoc may be able to ride on their coattails to boost its presence in the food-service industry.
For Manitowoc to improve, it really needs to shift its focus away from mature, developed markets and go where the growth is. Once it achieves that, Manitowoc should be able to move slowly but steadily up through the ranks -- as long as emerging markets continue to grow.
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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