Has Pinnacle Entertainment 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 Pinnacle Entertainment (NYSE: PNK  ) 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 Pinnacle Entertainment.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.4%

Fail

 

1-year revenue growth > 12%

4.9%

Fail

Margins

Gross margin > 35%

41.9%

Pass

 

Net margin > 15%

(2.7%)

Fail

Balance sheet

Debt to equity < 50%

322.2%

Fail

 

Current ratio > 1.3

1.17

Fail

Opportunities

Return on equity > 15%

(4.7%)

Fail

Valuation

Normalized P/E < 20

69.22

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

1 out of 10

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

Since we looked at Pinnacle Entertainment last year, the company has dropped a point, with revenue growth having slowed considerably. But investors haven't been unhappy with Pinnacle's performance, as the stock is up about 20% over the past year.

As a gaming company, Pinnacle isn't a household name for those who tend to focus on Macau and Las Vegas. But throughout the center of the U.S., Pinnacle casinos do business in New Orleans, St. Louis, and smaller river markets.

But Pinnacle announced some big news recently when it agreed to an $870 million acquisition of Ameristar Casinos (NASDAQ: ASCA  ) . With Ameristar's presence in the Midwestern and southern U.S., Pinnacle will go a long way toward building out its stronghold in America's heartland. Yet the deal also adds to Pinnacle's debt load, with the assumption of $1.9 billion of Ameristar's debt. If approved by the FTC, the deal should close in the middle of 2013.

Lately, though, regional gaming has sounded a dour note. Rival Penn National (NASDAQ: PENN  ) failed to meet its own guidance in its most recent quarterly report, as it cited a downbeat mood among its customers as hurting its results. Moreover, although Caesars Entertainment (NASDAQ: CZR  ) has seen signs of life in its Las Vegas properties, it also has big exposure in the same markets Pinnacle occupies, and Caesars similarly has a huge debt overhang.

For Pinnacle to improve, it needs the overall U.S. economy to get better and give its customers more disposable income. Until that happens, none of the regional companies mentioned here will have as strong prospects as the international gaming companies with which most investors are more familiar.

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.

Don't gamble with your retirement. The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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


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