Has Gardner Denver 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 Gardner Denver (NYSE: GDI  ) 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 Gardner Denver.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

4.7%

Fail

 

1-year revenue growth > 12%

(0.6%)

Fail

Margins

Gross margin > 35%

34.3%

Fail

 

Net margin > 15%

11.2%

Fail

Balance sheet

Debt to equity < 50%

25.4%

Pass

 

Current ratio > 1.3

1.45

Pass

Opportunities

Return on equity > 15%

19.3%

Pass

Valuation

Normalized P/E < 20

14.72

Pass

Dividends

Current yield > 2%

0.3%

Fail

 

5-year dividend growth > 10%

0%*

Fail

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes. * 3-year growth rate.

Since we looked at Gardner Denver last year, the company has dropped a point, as revenue growth came to a halt during 2012. The stock also posted lackluster performance, rising about 5% over the past year.

Gardner Denver makes a variety of different products for industrial use, ranging from compressors and blowers to vacuum pumps. With engineered products for the oil and gas industry, though, Gardner latched onto what became a high-growth area in recent years. But in its most recent quarterly report, Gardner noted a challenging environment for its petroleum and industrial pump segment, especially noting macroeconomic conditions as reason for it to implement moves like restructuring its European operations and implementing cost-control measures.

But the big news for Gardner through the year has come from talk of a proposed buyout. After the company said in October that it was considering strategic alternatives, many investors believed that SPX (NYSE: SPW  ) would make a bid for the company. But in December, it became clear that buyout talks with SPX were off the table and that the company would need to consider other bids from private-equity firms.

More recently, KKR (NYSE: KKR  ) came forward with a new $75-per-share bid for Gardner. With pressure from activist investors to accept a bid, Gardner may nevertheless hold out for more, especially if reports that SPX had planned to offer $85 per share prove true. Analysts believe that a price in the upper $70s is more likely to be the maximum possible.

For Gardner to improve, it would need to refocus on its core business operations. Until buyout talks get resolved, the distraction will make it tough for Gardner to get closer to 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.

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 Gardner Denver to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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