Is P.F. Chang's the Perfect Stock?

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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 P.F. Chang's (Nasdaq: PFCB  ) 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 P.F. Chang's.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 8.2% Fail
  1-Year Revenue Growth > 12% 1.7% Fail
Margins Gross Margin > 35% 18.6% Fail
  Net Margin > 15% 3.9% Fail
Balance Sheet Debt to Equity < 50% 0.3% Pass
  Current Ratio > 1.3 0.93 Fail
Opportunities Return on Equity > 15% 13.5% Fail
Valuation Normalized P/E < 20 22.56 Fail
Dividends Current Yield > 2% 2.8% Pass
  5-Year Dividend Growth > 10% NM NM
  Total Score   2 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; the company started paying a dividend in May 2010. Total score = number of passes.

P.F. Chang's can only manage to cook up a score of 2. Although the restaurant business overall is a tough one in today's environment, P.F. Chang's has some specific problems it's facing.

Asian cooking is a hot area for restaurants right now. Chipotle (NYSE: CMG  ) recently announced plans to open an offshoot chain called ShopHouse Southeast Asian Kitchen on the East Coast this summer.

But times have been tough for casual dining chains across the board. Looking at Cheesecake Factory (Nasdaq: CAKE  ) , Red Robin Gourmet Burgers (Nasdaq: RRGB  ) , and Darden Restaurants (NYSE: DRI  ) , you'll see the same story: slow revenue growth at best combined with narrow net margins.

Just yesterday, shares of the P.F. Chang's fell 10% after it released a poor earnings report that fell below expectations. In particular, the company lost more than $1 million in sales from eight Arizona restaurants that were raided by immigration officials.

With higher food costs, restaurant companies have had to choose between raising prices and potentially losing customers or holding the line and dealing with damage to already skinny margins. Until the situation changes, P.F. Chang's isn't going to look like the perfect stock.

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 P.F. Chang's 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 in this article. Chipotle is a Motley Fool Rule Breakers and Motley Fool Hidden Gems choice. Motley Fool Options has recommended writing a covered strangle on Red Robin Gourmet Burgers. The Fool owns shares of Chipotle and Red Robin Gourmet Burgers. 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.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

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 April 28, 2011, at 1:35 PM, buffalonate wrote:

    I bought today. It has a p/e ratio of 20 and a growth rate of 21%. I think it is currently the best value in the growth restaurant sector.

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