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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 Trinity Industries (NYSE: TRN ) 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 Trinity Industries.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.3%||Fail|
|1-Year Revenue Growth > 12%||44.1%||Pass|
|Margins||Gross Margin > 35%||18.6%||Fail|
|Net Margin > 15%||5.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||148.6%||Fail|
|Current Ratio > 1.3||2.15||Pass|
|Opportunities||Return on Equity > 15%||8.9%||Fail|
|Valuation||Normalized P/E < 20||13.11||Pass|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||8.4%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Trinity Industries last year, the company has gained a point. A 30% drop in the stock over the past year has made the shares look much more attractively valued, even if the company has plenty of challenges still ahead of it.
The railroad industry has become extremely popular in recent years. With oil prices remaining stubbornly high, the advantages that major railroad companies CSX (NYSE: CSX ) , Union Pacific (NYSE: UNP ) , and Norfolk Southern (NYSE: NSC ) have over alternative forms of transportation, especially trucking, are substantial.
Trinity isn't a railroad company, but its railcars make play a key role in helping railroads run more efficiently by giving them the opportunity either to lease or to buy the equipment they need. In addition, it also has interests in some barge traffic as well as some exposure to wind energy.
Lately, though, high leasing prices for railcars have raised concerns that demand may soon decrease. An analyst at KeyBanc cut its rating on Trinity competitor Greenbrier (NYSE: GBX ) , citing order delays and economic uncertainty as headwinds on the stock. The same potential problems also apply to Trinity's railcar business, which makes up about two-thirds of the company's total revenue.
For Trinity to improve, it needs to build on the significant growth it has put together and start working on boosting margins and paying down debt. With a reasonable dividend, if the company can get the rest of its financial house in order, it could eventually get a lot closer to perfection than it is right now.
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.
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