Has Brady 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 Brady (NYSE: BRC  ) 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 Brady.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(1.4%)

Fail

 

1-Year Revenue Growth > 12%

(3.5%)

Fail

Margins

Gross Margin > 35%

48.2%

Pass

 

Net Margin > 15%

(1.8%)

Fail

Balance Sheet

Debt to Equity < 50%

30.8%

Pass

 

Current Ratio > 1.3

2.54

Pass

Opportunities

Return on Equity > 15%

(2.1%)

Fail

Valuation

Normalized P/E < 20

17.09

Pass

Dividends

Current Yield > 2%

2.5%

Pass

 

5-Year Dividend Growth > 10%

5.5%

Fail

       
 

Total Score

 

5 out of 10

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

Since we looked at Brady last year, the company has kept its five-point score. The stock has also been relatively flat, rising about 5% over the past year.

Brady has a diversified set of businesses under its roof. Its ID solutions segment makes safety products such as identification and labeling systems, as well as security name tags and other access-control products. But it also makes precision die-cut products for sealing, insulation, and protection for mobile devices and hard disk drives. As a result, while it competes against Avery Dennison (NYSE: AVY  ) and Fortune Home & Security (NYSE: FBHS  ) on the ID and security front, it also goes up against R.R. Donnelley (Nasdaq: RRD  ) and its die-cutting business.

Brady's claim to fame is its dividend history, which boasts a long track record of payout growth. Yet while falling revenue and negative margins haven't forced the company to reverse its dividend growth to date, Brady will need to have earnings perk back up in the long run in order for the dividend to be sustainable.

Unfortunately, Brady's most recent quarter didn't show the strength investors would have preferred to see. Sales for its fiscal first quarter dropped 3%, and net income fell a much more dramatic 17%. The company trumpeted the growth of its mobile handset and tablet business, which remains a big source of potential business for Brady. With the company appearing on Apple's (Nasdaq: AAPL  ) list of suppliers in 2011, Brady is one of dozens of companies that are trying to share the success of Apple's iPhone and iPad lines.

For Brady to improve, it needs its mobile business to move forward more aggressively. If it can start generating revenue growth, Brady could get closer to perfection very quickly.

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.

Brady certainly isn't the only company seeking to profit from Apple's success, especially as its product launches come faster than ever. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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


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