Has Tata Motors 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 Tata Motors (NYSE: TTM  ) 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 Tata Motors.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

40.1%

Pass

 

1-year revenue growth > 12%

33.1%

Pass

Margins

Gross margin > 35%

29.9%

Fail

 

Net margin > 15%

7.6%

Fail

Balance sheet

Debt to equity < 50%

102.5%

Fail

 

Current ratio > 1.3

0.86

Fail

Opportunities

Return on equity > 15%

43.8%

Pass

Valuation

Normalized P/E < 20

11.41

Pass

Dividends

Current yield > 2%

1.4%

Fail

 

5-year dividend growth > 10%

(0.7%)

Fail

       
 

Total score

 

4 out of 10

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

Since we looked at Tata Motors last year, the company gave back the point it picked up from 2010 to 2011. But shareholders weren't unhappy, because it was a 50% jump in the stock over the past year that pushed Tata's dividend yield below the 2% mark.

Tata benefits greatly from its presence in India, as access to cheaper labor, as well as home-field advantage in a less competitive market, has given the automaker profit margins that put Ford (NYSE: F  ) and General Motors (NYSE: GM  ) to shame. Low costs have also allowed Tata to come out with its $2,500 Nano, the world's cheapest car.

But looking forward, Tata has bigger ambitions. It bought Jaguar Land Rover from Ford in 2008, putting it in position to go up against luxury brands like Toyota's (NYSE: TM  ) Lexus and GM's Cadillac. A new joint venture in China for luxury vehicle production will give Tata access to that lucrative, emerging market. It has also pushed more heavily into commercial vehicle production, capitalizing on a long-standing joint venture with engine-maker Cummins (NYSE: CMI  ) as well as newly picked-up acquisitions in Asia to ramp up its presence in the trucking industry. With its coming move into Indonesia, Tata could open up another potentially huge market.

In its most recent quarter, Tata again came through with strong growth, as sales jumped 20%. But net income growth of just 11% suggests that competitors' forays into Tata's home markets might finally be bearing fruit.

For Tata to improve, it needs to keep margins high while getting its dividend up to last year's levels. If it treats shareholders right, Tata could move back toward perfection in the near future.

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.

Tata has been rewarding shareholders for their efforts, but Ford hasn't been so lucky. It's had great financials lately, but Ford's stock can't get moving. Find out whether Ford is a buy by reading our in-depth research report on the automaker right now, with plenty of analysis telling you why. Simply click here to get instant access to this premium report.

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


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