Has RealD 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 RealD (NYSE: RLD  ) 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 RealD.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 44.9% Pass
  1-Year Revenue Growth > 12% 5.8% Fail
Margins Gross Margin > 35% 53.5% Pass
  Net Margin > 15% 11.9% Fail
Balance Sheet Debt to Equity < 50% 12.2% Pass
  Current Ratio > 1.3 2.21 Pass
Opportunities Return on Equity > 15% 16.9% Pass
Valuation Normalized P/E < 20 21.04 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

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

Since we looked at RealD last year, the company has picked up a point. Yet despite turning profitable, the stock has dropped 20% in the past year as the latest 3-D fad has once again failed to gain as much traction as many investors had hoped.

RealD sought to cash in on the demand for higher-powered movie theater experiences. Just as IMAX (NYSE: IMAX  ) has provided a unique "IMAX experience" for its viewers that has led to monumental growth in theater counts around the world, RealD had hoped to convince producers that 3-D movies would produce strong returns on the additional investment required.

Yet RealD's hopes haven't really panned out. Despite adding thousands of screens over the past year, RealD's revenue hasn't followed suit. Dolby Labs (NYSE: DLB  ) also saw drops in sales for digital cinema equipment, including 3-D-oriented products.

In its most recent quarter, RealD just added to fears that investors already had. Earnings per share came in at only a third of what analysts had expected, as rising product costs due in part to shipping less recycled 3-D eyewear took their toll on the bottom line. Although some had expected that Disney's (NYSE: DIS  ) Avengers and Lions Gate's (NYSE: LGF  ) Hunger Games would spark better results, RealD just isn't seeing the volume it needs to support its business model. Moreover, falling royalty rates could pose a long-term challenge to revenue.

For RealD to improve, it desperately needs movie studios to grab onto 3-D as a lasting new standard rather than just a passing fad. Unless the industry plays along, RealD may never get much 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 the best investments from the rest.

RealD may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of IMAX and Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney, Dolby Labs, and IMAX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2012, at 3:43 PM, BMFPitt wrote:

    I would have thought that investing in a 3D company would be foolish like 2 years ago when the fad was in full-swing, but now that it's already dying/dead you're going to call it a Buy?

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