Has ITT 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 ITT (NYSE: ITT  ) 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 ITT.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (23.2%) Fail
  1-Year Revenue Growth > 12% 11.1% Fail
Margins Gross Margin > 35% 30.5% Fail
  Net Margin > 15% (11.5%) Fail
Balance Sheet Debt to Equity < 50% 3.2% Pass
  Current Ratio > 1.3 2.01 Pass
Opportunities Return on Equity > 15% (19.9%) Fail
Valuation Normalized P/E < 20 13.36 Pass
Dividends Current Yield > 2% 2.1% Pass
  5-Year Dividend Growth > 10% 4.7% Fail
       
  Total Score   4 out of 10

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

Since we looked at ITT last year, the company has kept its four-point score. But the company looks far different from how it did back then, with its having spun off several of its businesses.

The big news for ITT in the past year was its spinoff of Exelis and Xylem (NYSE: XYL  ) back in October. Exelis took on ITT's former defense and aerospace business, with its manufacturing products like air traffic control technology, night vision goggles, and satellite imaging systems. Xylem, meanwhile, now represents ITT's old water infrastructure business, which made pumps, pipes, valves, and other equipment for transporting drinkable water. Both spun-off companies issued debt in order to pay a special dividend back to ITT in connection with the transactions.

Interestingly, this isn't the first time ITT has done big spinoffs. Back in 1994, it separated itself from its Rayonier (NYSE: RYN  ) forest products division and its ITT Educational Services (NYSE: ESI  ) division, and then spun off Hartford Financial (NYSE: HIG  ) the following year. Once a huge conglomerate, the company has thoroughly adopted the idea that the whole is worth less than the sum of its parts, many of which are still in existence and thriving.

What's left of ITT now is its industrial products division, but it still makes products for some of its old industries, including aerospace. Looking forward, the company's big draw is its ability to make what it calls "highly engineered" products, many of which have a built-in competitive moat.

For ITT to improve, it needs to consolidate after its most recent split-up and keep focusing on what it does best. If its customers continue to recover, then ITT could be in a better position in the years to come.

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 the best investments from the rest.

ITT 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 ITT 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. 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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