Has InterDigital 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 InterDigital (NASDAQ: IDCC  ) 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 InterDigital.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

23.1%

Pass

 

1-year revenue growth > 12%

119.7%

Pass

Margins

Gross margin > 35%

81%

Pass

 

Net margin > 15%

41%

Pass

Balance sheet

Debt to equity < 50%

39.2%

Pass

 

Current ratio > 1.3

4.71

Pass

Opportunities

Return on equity > 15%

54.9%

Pass

Valuation

Normalized P/E < 20

7.25

Pass

Dividends

Current yield > 2%

0.9%

Fail

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

8 out of 9

Source: S&P Capital IQ. NM = not meaningful; InterDigital started its payout in April 2011. Total score = number of passes.

Since we looked at InterDigital last year, the company gained back the two points it lost from 2011 to 2012. But the stock has only managed a gain of about 10% over the past year, roughly matching the broader market.

InterDigital has found great success over the years by licensing its mobile communications technology. With a massive portfolio of intellectual property, InterDigital has made lucrative arrangements with major technology providers. Just last month, the company extended its deal with BlackBerry (NASDAQ: BBRY  ) to license 4G-LTE related patents, as part of the beleaguered mobile-device maker's efforts to remain relevant in the smartphone space.

Moreover, InterDigital has had some success in the courtroom in the past year. During the summer, it got a favorable ruling against Nokia (NYSE: NOK  ) as it pursues patent royalties for 3G mobile-phone technology, ordering new proceedings that kept the case alive.

Yet InterDigital's stock suffered substantial declines as hopes that the company might receive an acquisition bid fizzled out. Despite a momentary love affair with patent-rich companies that led to InterDigital selling $375 million in patents to Intel (NASDAQ: INTC  ) , big tech had largely reached its saturation point with intellectual property, and that took out one of the supports for InterDigital's stock.

More recently, the company has shown signs of new life. InterDigital got added to the S&P MidCap 400 during the early fall, boosting investor awareness of the stock. Then, in its most recent quarter, InterDigital crushed expectations, with full-year 2012 net income tripling over 2011's results. With guidance for first-quarter revenue topping analyst projections by 30% to 40%, InterDigital thinks the good times may last for a while longer.

For InterDigital to improve, it needs to collect more royalties and pay them out in the form of higher dividends. If it can do so quickly, it could reach a perfect 10 in short order.

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.

With Intel having bought InterDigital's patents, can the chip giant make a big move into mobile technology? Find out whether Intel can move past the PC by reading our premium research report on the company, in which our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates for an entire year. Click here now to learn more.

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


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