Has P.F. Chang's Become 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 P.F. Chang's (Nasdaq: PFCB  ) 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 PF Chang's.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5% Fail
  1-Year Revenue Growth > 12% (0.8%) Fail
Margins Gross Margin > 35% 16.2% Fail
  Net Margin > 15% 2.1% Fail
Balance Sheet Debt to Equity < 50% 0.4% Pass
  Current Ratio > 1.3 0.83 Fail
Opportunities Return on Equity > 15% 7.7% Fail
Valuation Normalized P/E < 20 41.43 Fail
Dividends Current Yield > 2% 2.1% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   2 out of 9

Source: S&P Capital IQ. NM = not meaningful; P.F. Chang's paid its first dividend in May 2010. Total score = number of passes.

Since we looked at P.F. Chang's last year, the company hasn't been able to improve from its two-point score. But private investors apparently see more value in the restaurateur than the market has given it credit for.

The restaurant industry has gone through tough times in the past several years. The combination of the economic recession and high food costs has cut margins to the bone, and that's made it especially difficult for midrange chains to stay profitable. In particular, Ruby Tuesday (NYSE: RT  ) has had big problems on the growth front for a while now, and even Buffalo Wild Wings (Nasdaq: BWLD  ) suffered a quarterly earnings miss last summer despite its success in keeping its sales and earnings growing. For its part, P.F. Chang's has seen negative comps that had investors taking the stock out to the woodshed.

Moreover, P.F. Chang's faces some new competition. Chipotle (NYSE: CMG  ) introduced its ShopHouse Southeast Asian Kitchen concept last year, and while it's still just getting started, it could pose a big threat to P.F. Chang's Pei Wei Asian Diner fast-casual stores in the long run.

But earlier this week, P.F. Chang's got a lifeline in the form of a private equity buyout offer from Centerbridge Partners. With the offer's value pegged at $1.1 billion, the shares jumped 30% after the announcement and now trade within pennies of the $51.50 per share buyout price.

Unless something scuttles the deal, current shareholders won't get a chance to see whether P.F. Chang's reaches perfection. But with the ongoing challenges of the restaurant industry showing few signs of easing significantly, investors may be just as happy to get out at a nice price.

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.

P.F. Chang's 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 P.F. Chang's 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 in this article. The Motley Fool owns shares of Chipotle and Buffalo Wild Wings. Motley Fool newsletter services have recommended buying shares of Chipotle and Buffalo Wild Wings, as well as writing covered calls on Buffalo Wild Wings and creating a bear put spread position on Chipotle. 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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