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 Autoliv (NYSE: ALV ) 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 Autoliv.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.3%||Fail|
|1-Year Revenue Growth > 12%||6.5%||Fail|
|Margins||Gross Margin > 35%||20.5%||Fail|
|Net Margin > 15%||6.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||18.0%||Pass|
|Current Ratio > 1.3||1.61||Pass|
|Opportunities||Return on Equity > 15%||15.4%||Pass|
|Valuation||Normalized P/E < 20||12.33||Pass|
|Dividends||Current Yield > 2%||3.1%||Pass|
|5-Year Dividend Growth > 10%||4.2%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Autoliv last year, the company has lost a point. Thanks in large part to the big boost in the global auto industry, though, the stock has risen more than 30% in the past year.
As a maker of seat belts, air bags, and other vehicle safety equipment, Autoliv lives and dies with the health of the auto industry. As a major supplier to U.S. giants Ford (NYSE: F ) and General Motors (NYSE: GM ) as well as Nissan, BMW, and Daimler, to name just a few.
Recently, the varied economic picture has led to mixed results for Autoliv. After reporting slightly better than expected earnings in the second quarter, the company cut its forecast for the full 2012 year based on weakness in the European market, where new car registrations were down almost 9%. Yet it also points to relative strength in the U.S. market as helping it keep overall prospects more stable in the current quarter. That's consistent with what automakers have seen, as Ford and GM have struggled in Europe while Japanese makers Toyota (NYSE: TM ) and Honda do relatively little business there and thus haven't gotten hurt as much.
Autoliv also has to stave off competition. After a long period of underperformance, TRW Automotive (NYSE: TRW ) has bounced back and has announced innovations ranging from integrated brake control systems to camera-based technology. Yet TRW's latest developments show that Autoliv is much more focused on the safety segment, and Autoliv has a much higher market share than TRW and other competitors.
For Autoliv to improve, it needs to work on boosting revenue back to a faster growth path. If it can do so while still keeping returns on equity relatively high, it will have a better chance of looking closer to perfect in the years to come.
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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