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 Becton Dickinson (NYSE: BDX ) 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 Becton Dickinson.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.8%||Fail|
|1-Year Revenue Growth > 12%||6.4%||Fail|
|Margins||Gross Margin > 35%||51.6%||Pass|
|Net Margin > 15%||15.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||93.2%||Fail|
|Current Ratio > 1.3||3.27||Pass|
|Opportunities||Return on Equity > 15%||24.9%||Pass|
|Valuation||Normalized P/E < 20||15.75||Pass|
|Dividends||Current Yield > 2%||2.5%||Pass|
|5-Year Dividend Growth > 10%||13.3%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Becton Dickinson last year, the company has boosted its score by a point. A 15% drop in its stock price has brought down its valuation while kicking its growing yield above the 2% level.
Many investors like Becton for its stability. With a wide range of simple medical devices like syringes and catheters, as well as more advanced diagnostic tests, Becton is well-positioned for the expected demographic boost in health-care demand as Baby Boomers advance toward retirement.
But Becton is far from standing still. Its FocalPoint medical imaging system has made great advances toward helping medical professionals find problems at the cellular level quickly and efficiently. Although pure med-tech plays MAKO Surgical (Nasdaq: MAKO ) and Intuitive Surgical (Nasdaq: ISRG ) arguably have great growth potential with their focus on groundbreaking technology, Becton has the benefit of having a solid core business to support its more ambitious forays, leaving Becton far more appropriate for conservative investors than MAKO or Intuitive.
In its most recent quarter, Becton raised its earnings guidance for the rest of the year. Although its biosciences unit saw cutbacks from government agencies and academic institutions, its medical and diagnostic segments did fairly well.
The big challenge that Becton may face will come from competitors that are revamping their businesses. With both Abbott Labs (NYSE: ABT ) and Covidien (NYSE: COV ) planning to spin off their pharma units, their remaining businesses will be in more direct competition with Becton. How Becton responds will go a long way toward determining whether it will keep improving toward perfection or start losing ground.
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.
Becton Dickinson 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 Becton Dickinson to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.