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 and then decide whether Matthews International (Nasdaq: MATW ) 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.
- Moneymaking 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 Matthews International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.0%||Fail|
|1-Year Revenue Growth > 12%||4.2%||Fail|
|Margins||Gross Margin > 35%||37.6%||Pass|
|Net Margin > 15%||7.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||66.7%||Fail|
|Current Ratio > 1.3||2.19||Pass|
|Opportunities||Return on Equity > 15%||12.6%||Fail|
|Valuation||Normalized P/E < 20||14.49||Pass|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||10.4%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Matthews International last year, the company has maintained its 4-point score. But the stock has struggled to break even in a year in which the overall stock market is up substantially.
As a provider of caskets, cremation urns, and other funeral-related services, Matthews may seem to be in a defensively oriented industry that can ride out ups and downs in the overall economy. Yet despite a never-ending stream of customers, the competitive nature of the business as well as the wide range in costs of available options do in fact make Matthews somewhat susceptible to economic swings.
Along those lines, Matthews has faced challenges throughout the past year. Last November, the company said that an uncertain economic recovery would bring headwinds to its business. Then, in its most recent quarterly report, the company cut its guidance for the full year, blaming everything from the European financial crisis to a reduction in the U.S. death rate. Rising input costs are also an issue.
Moreover, Matthews has plenty of competition. StoneMor Partners (NYSE: STON ) boasts an amazingly rich 9% dividend yield, dwarfing Matthews' 1% payout. Similarly, Hillenbrand (NYSE: HI ) pays investors a 4% yield, and even Stewart Enterprises (Nasdaq: STEI ) and Service Corp. International (NYSE: SCI ) manage to beat Matthews on a dividend-yield basis. Hillenbrand and StoneMor have posted much faster revenue growth recently than Matthews as well.
For Matthews to improve, it needs to emphasize the international side of its business, where the true revenue growth potential is. Until that comes through, Matthews will have trouble getting closer to 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 out the best investments from the rest.
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