Has DigitalGlobe 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, then decide if DigitalGlobe (NYSE: DGI  ) 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 DigitalGlobe.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

22.2%

Pass

 

1-Year Revenue Growth > 12%

20.9%

Pass

Margins

Gross Margin > 35%

80.3%

Pass

 

Net Margin > 15%

(1.3%)

Fail

Balance Sheet

Debt to Equity < 50%

93.4%

Fail

 

Current Ratio > 1.3

4.02

Pass

Opportunities

Return on Equity > 15%

(1%)

Fail

Valuation

Normalized P/E < 20

35.16

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at DigitalGlobe last year, the company has picked up a point, thanks to acceleration in revenue growth. The stock has also done nicely, gaining nearly 30% over the past year.

DigitalGlobe provides satellite imagery for a wide variety of commercial and government applications. Unfortunately, ongoing concerns about budget cuts have held the stock back. Between DigitalGlobe and GeoEye (Nasdaq: GEOY  ) , one public-private defense program contract provides more than $7 billion in funding. When earnings came in lighter than expected in 2011's fourth quarter, it just fed fears that defense cuts could hurt DigitalGlobe even more in the future.

Since then, though, DigitalGlobe has made all the right moves. It made a deal with Baidu (Nasdaq: BIDU  ) to provide imaging for nearly 350 cities in China, following up on an expansion of its relationship with Sohu.com (Nasdaq: SOHU  ) last December to cover 100 cities.

More importantly, DigitalGlobe made a big strategic play by offering to buy rival GeoEye. Originally, GeoEye made the first move with a $790 million offer, but DigitalGlobe turned that down before making its own offer back at GeoEye in July. With cost savings estimated at $1.5 billion over two years, the combination faces some antitrust scrutiny from the Justice Department, but it opens up GeoEye's cache of customers, including Google (Nasdaq: GOOG  ) , to DigitalGlobe shareholders.

Despite beating estimates in its third quarter and raising full-year revenue guidance, DigitalGlobe needs to see its GeoEye acquisition approved and to realize the synergies that could boost its bottom line if it wants to keep improving. Otherwise, with continuing challenges to profits, it will be tough for DigitalGlobe to make much more progress toward perfection.

Keep searching
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.

DigitalGlobe's deal with Baidu is a big deal for both companies. Despite slower Chinese growth, there may be opportunity in Baidu. Find out whether Baidu is a must-buy our new premium report, which breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend Baidu, GeoEye, Google, and Sohu.com. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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