Has Bunge 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 Bunge (NYSE: BG  ) 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 a 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 Bunge.

Factor

What We Want to See

Actual

Pass or Fail?

Growth Five-Year annual revenue growth > 15% 16.5% Pass
  One-year revenue growth > 12% 26.2% Pass
Margins Gross margin > 35% 4.4% Fail
  Net margin > 15% 1.3% Fail
Balance Sheet Debt to equity < 50% 41.1% Pass
  Current ratio > 1.3 1.95 Pass
Opportunities Return on equity > 15% 6.1% Fail
Valuation Normalized P/E < 20 17.05 Pass
Dividends Current yield > 2% 1.9% Fail
  Five-year dividend growth > 10% 9.2% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Bunge last year, the company has picked up a point. But even with more rapid sales growth, the company's shares have fallen almost 20% over the past year.

Bunge has benefited in recent years from the surge in prices for agricultural commodities. With supplies of crops remaining somewhat limited, Bunge has ridden the same wave that helped fertilizer companies PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) recover from their post-financial-crisis doldrums.

More recently, though, the company has started to slow down. In its first-quarter results, Bunge reported a huge 60% drop in net income, falling far short of analyst estimates. The problem came largely from its ethanol production as high corn prices squeezed margins.

But Bunge is taking steps to boost its growth. In April, the company announced a joint venture with Solazyme (Nasdaq: SZYM  ) to build a plant to produce renewable tailored oils in Brazil. Although most investors focused on the impact on Solazyme, Bunge also stands to gain by using its experience in pursuit of profitable partnerships. In addition, Bunge is seeking to expand in Russia and other foreign markets, while rival Archer Daniels Midland (NYSE: ADM  ) also looks to boost its overseas presence.

For Bunge to keep improving, it needs to find ways to expand its margins, even as it continues its sales growth. By translating more of its revenue into profit, Bunge should be able to increase its returns on equity and keep increasing its dividend. That would put Bunge on the road toward perfection if current agriculture trends persist.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Bunge 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 Bunge 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 Solazyme. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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