Has Noranda Aluminum 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 whether Noranda Aluminum (NYSE: NOR  ) 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 Noranda Aluminum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(0.1%)

Fail

 

1-Year Revenue Growth > 12%

(10.5%)

Fail

Margins

Gross Margin > 35%

9.2%

Fail

 

Net Margin > 15%

5%

Fail

Balance Sheet

Debt to Equity < 50%

361.5%

Fail

 

Current Ratio > 1.3

2.16

Pass

Opportunities

Return on Equity > 15%

26.3%

Pass

Valuation

Normalized P/E < 20

51.04

Fail

Dividends

Current Yield > 2%

2.4%

Pass

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful; Noranda initiated a regular dividend in November 2011. Total score = number of passes.

Since we looked at Noranda Aluminum last year, the company has dropped a point, as weaker earnings and a big contraction in revenue combined to hit the aluminum maker's score. Noranda's stock hasn't fared any better, with share prices down by about a third from this time last year.

Noranda isn't exactly the biggest player in the aluminum market, but it still plays a valuable role in certain niche markets. With products for applications in the automotive, housing, heating and cooling, and recreational vehicle industries, Noranda benefits from diversified exposure to areas that have held up reasonably well even during the tough economy.

Moreover, Noranda has some key advantages over larger rivals Alcoa (NYSE: AA  ) , Rio Tinto (NYSE: RIO  ) , and Aluminum Corp. of China (NYSE: ACH  ) . By focusing on the U.S. market, Noranda gets a bit of extra revenue compared to prevailing world prices. Even a few extra cents per pound is enough to keep Noranda profitable, despite falling aluminum prices worldwide. In addition, with a vertically integrated production process, Noranda has complete control of its expenses and doesn't have to worry about higher costs of raw materials from external suppliers.

Unfortunately, a weak aluminum market has still taken its toll on Noranda. In its most recent quarter, the company managed to beat expectations but still saw significant year-over-year declines in revenue and GAAP net income.

For Noranda to improve, a return to strength for the ailing Chinese economy would be the quickest way back to prosperity. Until then, though, thin margins and weak demand will plague the company and keep Noranda from making much 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.

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