Is Mindray Medical 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 Mindray Medical (NYSE: MR  ) 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 Mindray Medical.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

30.7%

Pass

 

1-Year Revenue Growth > 12%

21.3%

Pass

Margins

Gross Margin > 35%

55.4%

Pass

 

Net Margin > 15%

19.4%

Pass

Balance Sheet

Debt to Equity < 50%

8.5%

Pass

 

Current Ratio > 1.3

3.69

Pass

Opportunities

Return on Equity > 15%

16.1%

Pass

Valuation

Normalized P/E < 20

26.89

Fail

Dividends

Current Yield > 2%

1.1%

Fail

 

5-Year Dividend Growth > 10%

18.9%*

Pass

 
 
   
 

Total Score

 

8 out of 10

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

With a score of eight, Mindray Medical already comes quite close to perfection. But the medical device maker hasn't gotten past all its obstacles just yet.

Mindray makes basic medical equipment, including ultrasound machines, vital-sign monitors, and diagnostic instruments. But even if its equipment isn't particularly innovative, Mindray seeks a competitive edge against rivals like Abbott Labs (NYSE: ABT  ) and the health-care divisions of General Electric (NYSE: GE  ) and Philips Electronics (NYSE: PHG  ) on one simple basis: quality products at lower prices. That's a thesis that mega-investor George Soros got behind, as he bought shares of the company late last year for his portfolio.

In many ways, it's unclear why investors aren't more optimistic. For instance, yesterday, the stock dropped 7% after Mindray announced earnings. Yet with both revenue and earnings well in excess of market expectations and double-digit growth in all of its segments, Mindray shares should have gone up, not down. Moreover, the company announced a $100 million buyback -- another shareholder-friendly action.

Oddly enough, though, even as most investors look to emerging markets to provide growth, Mindray is having the most trouble in its domestic Chinese market. Just as actions from the government have put companies in other sectors in jeopardy, including Baidu (Nasdaq: BIDU  ) and SINA (Nasdaq: SINA  ) , falling government spending and lower demand from local hospitals hurt Mindray's Chinese sales, too. Its international business has kept results strong, but that still seems backwards for a company that should have a home-field advantage in China.

For Mindray to reach perfection, it needs to sustain its growth path for its dividend. If it can then restore its confidence in its domestic markets and get its valuation down, then the company could find itself on the cusp of the 10-point threshold.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs. Motley Fool newsletter services have recommended buying shares of Abbott Labs, Baidu, and SINA. 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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