Has Citrix Systems Become the Perfect Stock?

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 if Citrix Systems (Nasdaq: CTXS  ) 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 Citrix Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

14%

Fail

 

One-year revenue growth > 12%

18.1%

Pass

Margins

Gross margin > 35%

88.8%

Pass

 

Net margin > 15%

15.1%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

1.65

Pass

Opportunities

Return on equity > 15%

12.9%

Fail

Valuation

Normalized P/E < 20

49.32

Fail

Dividends

Current yield > 2%

0%

Fail

 

Five-year dividend growth > 10%

0%

Fail

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Citrix Systems last year, the company's score hasn't budged. After trading much higher earlier in 2012, the stock has settled down to about a 20% gain over the past year.

Citrix has become a big player in the growing trend toward virtualization. Although VMware (NYSE: VMW  ) currently leads the industry, both Citrix and Microsoft (Nasdaq: MSFT  ) are making inroads in the space, with Citrix in particular gaining a positive reputation among customers. In addition, Citrix has the No. 2 market-share position in online collaboration, trailing only Cisco (Nasdaq: CSCO  ) and its WebEx product.

But cloud computing is the next potential growth area for Citrix. The company is well behind Amazon and other dedicated cloud players, but with Citrix having made the CloudStack platform it bought in last year's Cloud.com acquisition open-source, it hopes sales of its XenServer virtualization platform will increase.

Citrix faces heavy competition, though. Earlier this week, Polycom (Nasdaq: PLCM  ) said it expected its new cloud-based videoconferencing product to make a meaningful impact in the industry within the next three years. As small companies jockey for position among tech giants, Citrix will need to do its best to preserve its position.

For Citrix to improve, it needs earnings to catch up with its lofty stock prices. If it can maintain sales growth and try to boost return on equity, Citrix could easily approach perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection 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.

Citrix Systems is fighting Cisco in teleconferencing, but it has a long way to go. Get another view on the industry by looking at the Fool's premium research report on Cisco Systems, where we answer whether Cisco is a buy at current levels. Don't wait another moment; click here and get the answers you need today.

Click here to add Citrix Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Cisco Systems, VMware, Amazon.com, and Microsoft. Motley Fool newsletter services have recommended buying shares of Polycom, VMware, and Amazon.com, as well as creating a synthetic covered call position in Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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