Has MetroPCS 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 MetroPCS (NYSE: PCS  ) 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 MetroPCS.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.0% Pass
  1-Year Revenue Growth > 12% 14.8% Pass
Margins Gross Margin > 35% 38.9% Pass
  Net Margin > 15% 5.4% Fail
Balance Sheet Debt to Equity < 50% 161.7% Fail
  Current Ratio > 1.3 3.56 Pass
Opportunities Return on Equity > 15% 9.5% Fail
Valuation Normalized P/E < 20 8.46 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   5 out of 10

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

Since we looked at MetroPCS last year, the company has maintained its five-point score. But shareholders have gotten hurt hard, with a more than 60% drop in the stock reflecting many more difficulties than its financials would suggest.

The booming mobile industry has experienced tremendous growth over the past several years. As smartphones have gone from top-of-the-line toys for early adopters to mainstream must-have devices, major networks AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint (NYSE: S  ) have responded with massive network upgrades to support the big jump in data throughput that newer devices require.

But MetroPCS has largely missed out on the smartphone craze. Only 6% of its subscribers are using its 4G LTE network, forcing the company to offer rebates to customers as an incentive to get them to upgrade. Yet as MetroPCS falls further behind the curve, it risks missing out on new customers seeking the latest innovations.

Without the resources that larger carriers have, MetroPCS needs help. The company considered a merger with Sprint, but that didn't end up bearing fruit. Fool contributor Sean Williams suggests that a combination with Clearwire (Nasdaq: CLWR  ) would benefit both companies, giving Clearwire much-needed cash while letting MetroPCS have access to Clearwire's wireless spectrum assets.

Earlier today, the company released its second-quarter earnings report, in which it reported a promising 77% rise in earnings. But revenue again fell short of expectations, and subscriber losses are troubling.

For MetroPCS to improve, it needs to make a last-ditch effort to get out of the second tier of mobile providers. Unless it does, it will get stuck for good in a niche that has few prospects for perfection ahead.

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 out the best investments from the rest.

MetroPCS isn't perfect, but we've got some other ideas for you to take a look at. 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 MetroPCS 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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