Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Sanofi-Aventis (NYSE: SNY ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure that a company is able to turn revenue into profit.
- The balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Sanofi-Aventis.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.4%||Fail|
|1-Year Revenue Growth > 12%||4.2%||Fail|
|Margins||Gross Margin > 35%||72.8%||Pass|
|Net Margin > 15%||17.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||15.5%||Pass|
|Current Ratio > 1.3||1.99||Pass|
|Opportunities||Return on Equity > 15%||11.2%||Fail|
|Valuation||Normalized P/E < 20||11.87||Pass|
|Dividends||Current Yield > 2%||5.0%||Pass|
|5-Year Dividend Growth > 10%||10.5%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With 7 points, Sanofi is doing quite well. The drugmaker's attempts at a major acquisition and other strategic partnerships show that it's doing what it can to defend its turf and expand against its rivals.
The biggest news for Sanofi recently has been its ongoing attempt to buy out Genzyme (Nasdaq: GENZ ) . Sanofi has made a $69-per-share tender offer to Genzyme shareholders, but the target company has rejected the offer as too low and wants a better offer. So far, shareholders agree with Genzyme, as shares trade almost $4 higher than the offer price.
Still, Sanofi faces the same problems of generic competition as other major first-run drugmakers do. Its blood-clot prevention drug Lovenox has been a gold mine, not just for Sanofi but also for Momenta Pharmaceuticals (Nasdaq: MNTA ) and marketing partner Novartis (NYSE: NVS ) , which were first in line to come out with a generic version of the drug. With the first-mover generics choosing to charge near Sanofi's price for Lovenox, even the 47% hit to Sanofi's U.S. sales of the drug wasn't as bad as it could be once Teva Pharmaceutical (Nasdaq: TEVA ) or another generic competitor gets approval for a competing version of the drug.
Despite those challenges, Sanofi looks like a strong stock. If it can find ways to accelerate growth, either with a Genzyme acquisition or other strategic moves, it could move closer to perfection in short order.
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.
Add Sanofi-Aventis to My Watchlist, which will gather all of our Foolish analysis on it, as well as all the other stocks you choose to follow.