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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 Mead Johnson Nutrition (NYSE: MJN ) 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 Mead Johnson Nutrition.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.4%||Fail|
|1-Year Revenue Growth > 12%||11.6%||Fail|
|Margins||Gross Margin > 35%||62%||Pass|
|Net Margin > 15%||14.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.60||Pass|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||28.27||Fail|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||0%*||Fail|
|Total Score||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to negligible shareholder equity. Total score = number of passes. *Since first dividend in July 2009.
Since we looked at Mead Johnson Nutrition last year, the company has dropped a point, as revenue growth slowed in the past 12 months. Moreover, the stock has managed to eke out only a tiny gain in a generally up market over the past year.
Mead Johnson makes baby formula and other children's nutritional products. Its Enfamil brand is a familiar name among new parents, and the company has global scope.
But Mead Johnson suffered a big scare in the past year. Late last December, a 10-day-old infant died after taking Enfamil, and shares dropped sharply as a result as major retailers pulled formula from their shelves. After inspection, however, the FDA concluded that the batch of formula was free of bacteria and other harmful contents.
The longer-term threat to Mead Johnson, though, comes from strong competition. Earlier this year, Pfizer (NYSE: PFE ) sold its infant nutrition business to Nestle, which submitted a higher bid than a group that included Mead Johnson. Moreover, Abbott Labs (NYSE: ABT ) is splitting itself into two parts, with one part focusing directly on nutritional offerings that include Ensure, Pedialyte, and Similac, directly competing against Mead Johnson's products. Perrigo (Nasdaq: PRGO ) also makes store-brand formulas and other nutritional products.
For Mead Johnson to improve, it needs to keep struggling to find avenues for growth. Yet in a competitive atmosphere, that won't be easy. Unless it can find innovative ways to expand, Mead Johnson will have a tough time growing toward perfection.
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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