Has Swisher Hygiene 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 Swisher Hygiene (NASDAQ: SWSH  ) 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 Swisher Hygiene.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

35.0%

Pass

 

1-year revenue growth > 12%

138.4%

Pass

Margins

Gross margin > 35%

37.1%

Pass

 

Net margin > 15%

(18.2%)

Fail

Balance sheet

Debt to equity < 50%

14.9%

Pass

 

Current ratio > 1.3

1.96

Pass

Opportunities

Return on equity > 15%

(16.9%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Swisher Hygiene last year, the company has kept its five-point score. But the stock has lost more than half its value as it has had to resolve some touchy accounting issues and faced a tough business environment.

Swisher's business is fairly pedestrian, as it provides hygiene and sanitary products like soap, floor cleaner, and tissue paper to commercial customers in a wide range of industries. Because of Chairman Wayne Huizenga's background at Waste Management (NYSE: WM  ) , investors have been optimistic that Swisher could repeat its success story of acquiring small companies and growing into a larger player in the industry. That strategy has worked to great success at Waste Management, which is the established giant in the U.S. recycling and waste disposal industry.

But so far, Swisher's expansion has only led to deeper losses. Moreover, the company had to go through an internal review in the middle of 2012 after noting potential past accounting problems tied to the complicated web of acquisitions it has made in recent years. After replacing its CFO, Swisher's stock rallied briefly but then turned back downward on news in August that the CEO was leaving and that the company was in danger of being delisted from the Nasdaq. After delays related to the accounting review, Swisher has finally released results over the past month or so covering 2011 and the first three quarters of 2012, but while revenue growth has continued, profits continue to elude the company.

Swisher faces competition from larger player Ecolab (NYSE: ECL  ) , which serves larger clients like restaurant and hotel chains and claims the biggest market share in the business. Ecolab has also grown substantially over the past year, thanks to its acquisition of Nalco in late 2011 and its expansion in the water-treatment and energy-services area. Meanwhile, Stericycle (NASDAQ: SRCL  ) has found a profitable niche in medical waste, serving health care institutions. Swisher's smaller business niche hasn't panned out the same way.

For Swisher to improve, it needs to integrate its acquired businesses and start working on internal efficiency. Without profits, Swisher will never get any closer to becoming a perfect stock.

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.

Swisher hopes that Huizenga's leadership will give it the same success as Waste Management, but even Waste Management's share-price performance over the last few years has left many investors wanting. If you're wondering whether this dividend dynamo is a buy today, you should read The Motley Fool's premium analyst report on the company today. Just click here now for access.

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


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