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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 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.
What We Want to See
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.
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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