Has TRW Automotive 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 TRW Automotive (NYSE: TRW  ) 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 TRW Automotive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

3.1%

Fail

 

1-year revenue growth > 12%

2.7%

Fail

Margins

Gross margin > 35%

11%

Fail

 

Net margin > 15%

6.2%

Fail

Balance sheet

Debt to equity < 50%

39%

Pass

 

Current ratio > 1.3

1.28

Fail

Opportunities

Return on equity > 15%

32%

Pass

Valuation

Normalized P/E < 20

10.00

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 10

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

Since we looked at TRW Automotive last year, the company has kept its three-point score. But the stock hasn't disappointed shareholders, with a stellar rise of nearly 70% over the past year.

TRW makes electronic safety systems for automobiles, including adaptive cruise control that allows drivers to maintain safe trailing distances rather than having to brake when cars slow down ahead. The company supplies parts to more than 40 manufacturers around the world.

Coming into 2012, TRW had severely disappointed investors. But that all changed this year, as the stock rebounded from its 40% loss in 2011. TRW got things off on the right foot in February by posting record sales to close out the fiscal 2011 year, and it steadily paid down debt to get its balance sheet in better order.

TRW does have to deal with competitive pressures, though. On the safety side of its business, TRW goes up against Autoliv (NYSE: ALV  ) and its big presence in seat belts and airbags. Meanwhile, TRW's auto components face competition from Illinois Tool Works (NYSE: ITW  ) , Delphi, and a host of other parts makers. Even in a low-margin business, though, TRW holds its own against the competition.

A couple of months ago, TRW announced a big share buyback, bolstering confidence that the company's European exposure might not give investors more headaches down the road. Despite the fact that Ford (NYSE: F  ) and General Motors (NYSE: GM  ) have suffered substantial losses in Europe, TRW clearly believed that its shares were an absolute bargain at just six times earnings, and that call has proven correct, at least in the short run.

For TRW to improve, it needs to keep bringing debt levels down, and work on trying to bolster growth. In a cutthroat industry, though, it'll take a long time before TRW can approach 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.

In the auto industry, parts makers operate under the radar, while vehicle makers get all the headlines. Ford has recovered strongly from the recession, but its stock hasn't moved very far recently. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? Get answers from one of our top equity analysts, who has compiled a premium research report with in-depth analysis on whether Ford is a buy right now and why. Simply click here to get instant access to this premium report.

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


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