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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 DreamWorks Animation (Nasdaq: DWA ) 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 DreamWorks Animation.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.3%||Fail|
|1-Year Revenue Growth > 12%||(14.2%)||Fail|
|Margins||Gross Margin > 35%||29.5%||Fail|
|Net Margin > 15%||9.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.29||Pass|
|Opportunities||Return on Equity > 15%||4.9%||Fail|
|Valuation||Normalized P/E < 20||24.47||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at DreamWorks Animation last year, the company has lost three full points. The stock has also given shareholders a less than entertaining ride, dropping about 15% over the past year.
Like its movie-producing rivals, DreamWorks lives and dies based on the successes and failures of its blockbusters. This summer, Madagascar 3 has been a big hit for the studio, with more than $1.7 billion in box office receipts worldwide.
Yet increasingly, DreamWorks has realized that it needs to go beyond the big screen in order to thrive. Last year, it signed a streaming video deal with Netflix (Nasdaq: NFLX ) to provide content through 2018. It also decided to switch distributors, moving away from Viacom's Paramount in favor of News Corp.'s Fox. The move will save it money on digital distribution and TV and cable releases.
DreamWorks is also jumping on the bandwagon toward getting more exposure in China, responding to Disney's (NYSE: DIS ) planned theme park in Shanghai. But DreamWorks is actually creating an animation studio in China as part of a larger entertainment complex in which DreamWorks will retain a 45% interest alongside a Chinese consortium. The entertainment district will include the world's biggest IMAX (NYSE: IMAX ) theater. The move follows up on DreamWorks' deal with Youku.com (NYSE: YOKU ) to distribute the Kung Fu Panda series online last year.
For DreamWorks to improve, it needs to keep making these creative strategic moves in an attempt to bolster its sales. With content at a premium, though, DreamWorks looks poised to boost its score in the years ahead.
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.
DreamWorks may be looking to Netflix for success, but for its part, Netflix has had its ups and downs -- with lots of downs. Find out whether the streaming giant is a value play or a value trap by looking at the Fool's premium report on Netflix. Our top analysts scour the financials inside and out to identify the company's pros and cons, so don't wait another minute -- read it today.
Click here to add DreamWorks Animation to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.