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 PACCAR (Nasdaq: PCAR ) 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 PACCAR.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.6%||Fail|
|1-Year Revenue Growth > 12%||42.8%||Pass|
|Margins||Gross Margin > 35%||13.8%||Fail|
|Net Margin > 15%||6.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||131.6%||Fail|
|Current Ratio > 1.3||4.40||Pass|
|Opportunities||Return on Equity > 15%||21.2%||Pass|
|Valuation||Normalized P/E < 20||13.66||Pass|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||6.0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PACCAR last year, the company has doubled its score. With a big rebound in revenue and internal return on equity, the stock has risen more than 10% in the past year.
PACCAR is a big player in the truck-making industry as the company behind the heavy-duty Kenworth and Peterbilt brands. Trucking has been a tough niche for some players, as Navistar (NYSE: NAV ) has struggled to recover from EPA fines for its pollution-producing engines, while truck-engine maker Cummins (NYSE: CMI ) has struggled in its efforts to turn the rapidly growing natural-gas-powered truck business into big share-price gains.
But PACCAR has capitalized on the need for its customers to replace their aging fleets of existing trucks, which has contributed to its big revenue growth this year. Despite weak sales in Europe, North American demand has gone through the roof. Conversely, for those who try to prolong the usable life of their current fleets, PACCAR's aftermarket sales of parts and accessories should also benefit.
Moreover, PACCAR is jumping onto the green movement. Using engines from the partnership between Cummins and Westport Innovations (Nasdaq: WPRT ) demonstrates its commitment to natural gas as a viable alternative fuel. With Navistar working closely with Clean Energy Fuels (Nasdaq: CLNE ) to develop natural-gas fueling infrastructure, a nat-gas solution is essential for PACCAR's future.
For PACCAR to improve, it needs to seek ways to turn its new sales growth into greater profitability. With shares reasonably priced, it's worth keeping PACCAR on your radar to see whether it can start moving toward perfection in the near future.
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.
PACCAR may well come to rely on Clean Energy Fuels and its network of gas-fueling stations. Learn more about the nat-gas innovator in the Fool's premium report on Clean Energy Fuels, which includes the latest from our energy analysts along with free updates all year long. Check it out today.
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