Has New Zealand Telecom 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 and then decide whether New Zealand Telecom (NASDAQOTH: NZTCY.PK) 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.
  • Moneymaking 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 New Zealand Telecom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (4.1%) Fail
  1-Year Revenue Growth > 12% (8.5%) Fail
Margins Gross Margin > 35% 56.2% Pass
  Net Margin > 15% 25.9% Pass
Balance Sheet Debt to Equity < 50% 64.3% Fail
  Current Ratio > 1.3 0.81 Fail
Opportunities Return on Equity > 15% 15.8% Pass
Valuation Normalized P/E < 20 19.93 Pass
Dividends Current Yield > 2% 8.5% Pass
  5-Year Dividend Growth > 10% (10.8%) Fail
       
  Total Score   5 out of 10

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

Since we looked at New Zealand Telecom last year, the company has picked up two points, even beating its 2010 score of 4. But the company has posted a small loss over the past year, perhaps in part because it no longer trades on the New York Stock Exchange.

New Zealand Telecom is a prime example of the opportunities that investors have found in telecom stocks throughout the world. Like Frontier Communications (Nasdaq: FTR  ) , New Zealand Telecom is trying to retain its legacy landline customers. Yet like AT&T (NYSE: T  ) , the company is also trying to move forward with mobile offerings and other high-margin products to bolster growth.

Unlike European telecoms France Telecom (NYSE: FTE  ) and Telefonica (NYSE: TEF  ) , which have tried to expand beyond their home markets to capture business elsewhere, New Zealand Telecom doesn't have much in the way of international growth prospects. Geographically, the island nation's isolation doesn't give the telecom company much room to expand. As a result, investors need to understand that New Zealand Telecom's dividend gives them most of the return potential they're going to get from the stock.

Unfortunately for U.S. investors, New Zealand Telecom decided earlier this year to voluntarily delist its shares from the NYSE to save costs. That makes it more difficult to obtain shares. But with new CEO Simon Moutter having taken the helm earlier this month, the company bears watching to see where it can go.

For New Zealand Telecom to improve, its best prospect is to reduce its debt slightly. Beyond that, the company's revenue contraction could be hard to reverse in the near term, limiting New Zealand Telecom's ability to get much closer to perfection in the future.

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.

New Zealand Telecom may not be an easy pickup for U.S. investors, but Frontier Communications is easy to buy. The question, though, is whether it's a good buy. Get all the arguments for and against in the Fool's premium report on Frontier Communications. All it takes is a click to get you a personal copy of this report.

Add New Zealand Telecom 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 France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. 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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