Has PDL BioPharma 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 PDL BioPharma (NASDAQ: PDLI  ) 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 PDL BioPharma.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

19%

Pass

 

1-year revenue growth > 12%

(1.1%)

Fail

Margins

Gross margin > 35%

100%

Pass

 

Net margin > 15%

55.7%

Pass

Balance sheet

Debt to equity < 50%

NM

NM

 

Current ratio > 1.3

6.28

Pass

Opportunities

Return on equity > 15%

NM

NM

Valuation

Normalized P/E < 20

6.06

Pass

Dividends

Current yield > 2%

7.7%

Pass

 

5-year dividend growth > 10%

(35.3%)*

Fail

       
 

Total score

 

6 out of 8

Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes. *Compares current regular dividend to mid-2008 special dividend.

Since we looked at PDL BioPharma last year, the company finally made some progress after staying roughly flat from 2010 to 2011. Shareholders have also been pleased with gains of nearly 30% over the past year.

PDL BioPharma is a rarity in the biotech world, with its huge dividend yield standing out from the crowd. Even well-established biotechs Celgene (NASDAQ: CELG  ) and Gilead Sciences (NASDAQ: GILD  ) don't pay dividends, and Amgen (NASDAQ: AMGN  ) made big news when it came out with a relatively modest dividend last year that currently yields 1.6%.

What make PDL BioPharma's payouts possible are its royalty arrangements with several major drugmakers. The company is able to license out its antibody technology, with big successes coming from well-known drugs like Avastin and Tysabri. Yet while Roche and Elan (UNKNOWN: ELN.DL2  ) , the makers of those drugs, have been supplying revenue for the company, PDL BioPharma faces potentially catastrophic events over the next two years, as its patents expire.

In response, PDL BioPharma's management is trying to find new prospects for intellectual property to license in order to sustain the dividend. Earlier this year, it added Roche's Perjeta breast cancer treatment to its portfolio.

For PDL BioPharma to improve, it will need to find new sources of revenue going forward. Otherwise, the company may not survive long enough to reach 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.

Even though Celgene doesn't pay a dividend, many investors see it as a smarter way to play the biotech investing game. But is now the time to buy into the company's stock, or are truly smart investors waiting? Our health-care analysts weigh in with their views of Celgene's key opportunities and risks in The Motley Fool's brand new premium report. To claim your copy today, simply click here now.

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


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  • Report this Comment On December 12, 2012, at 11:32 AM, doodle6 wrote:

    Please read comments on GORO on Oct. 11. I lost over 1500 on a "perfect stock". Caveat emtour

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