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 Emergent BioSolutions (NYSE: EBS ) 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 Emergent BioSolutions.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.3%||Fail|
|1-Year Revenue Growth > 12%||(4.5%)||Fail|
|Margins||Gross Margin > 35%||38.9%||Pass|
|Net Margin > 15%||8.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||14.3%||Pass|
|Current Ratio > 1.3||3.58||Pass|
|Opportunities||Return on Equity > 15%||4.1%||Fail|
|Valuation||Normalized P/E < 20||29.02||Fail|
|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.
With only three points, Emergent BioSolutions still has some work to do. But after a tough 2011, the stock has promise for future gains as the world becomes more aware of biological threats.
For a small company, Emergent has a nice stable of drugs in its pipeline. In addition to its BioThrax anthrax vaccine, the company is also developing a rheumatoid arthritis treatment with Pfizer (NYSE: PFE ) . It also acquired all rights to a leukemia and non-Hodgkin's lymphoma drug that it had worked with Abbott Labs (NYSE: ABT ) to develop. Moreover, unlike many of its peers, the company is making money.
One area of growth potential for Emergent is the government's Strategic National Stockpile. Last year, SIGA Technologies (Nasdaq: SIGA ) won a government contract for up to $2.8 billion to provide smallpox antivirals, while Human Genome Sciences (Nasdaq: HGSI ) got a similar contract back in 2009 to provide treatments for inhalation anthrax. Last fall, Emergent got its own good news, with a $1.25 billion contract with the Centers for Disease Control to provide 44.75 million doses of its BioThrax anthrax vaccine.
Just last week, Emergent saw a nice pop in its stock following its quarterly earnings report. Yet although the company beat expectations for earnings per share, revenue fell short. Even worse, Emergent's 2012 guidance was also less than analysts had hoped to see.
Despite its modest score, Emergent actually has a promising future. If it can keep delivering on hot-button areas for the government and also move forward in other directions, Emergent should move up significantly on our 10-point scale in the years to come.
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.
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