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 Vail Resorts (NYSE: MTN ) 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 Vail Resorts.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.7%||Fail|
|1-Year Revenue Growth > 12%||(11.2%)||Fail|
|Margins||Gross Margin > 35%||18.4%||Fail|
|Net Margin > 15%||1.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||59.8%||Fail|
|Current Ratio > 1.3||0.87||Fail|
|Opportunities||Return on Equity > 15%||1.7%||Fail|
|Valuation||Normalized P/E < 20||70.32||Fail|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||0 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Vail Resorts paid its first dividend in June 2011. Total score = number of passes.
Since we looked at Vail Resorts last year, the company has lost its last point. A warm winter may have boosted some industries, but skiing certainly doesn't benefit from winter weather that doesn't deliver the goods.
Seasonal businesses always count on their peak seasons. Just as cruise-ship operators Royal Caribbean (NYSE: RCL ) and Carnival (NYSE: CCL ) rely on summer-vacation business to get the lion's share of their sales, Vail Resorts needs winter weather to bring the snow its customers long for. But this year companies that specialize in winter activities have been at risk from the weather. Snowmobile maker Polaris Industries (NYSE: PII ) managed to overcome any negative impact that less snow might have had and announced strong first-quarter results thanks to a diversified line of non-winter products. Analysts fear that Arctic Cat (Nasdaq: ACAT ) won't be as lucky, as they expect a wider loss than last year.
Vail Resorts' most recent quarterly results reflect the winter's impact. With almost no snow from November to January at its Tahoe resorts, and significant snow not arriving in Colorado until mid-January, Vail's net income fell 15% despite its attempt to boost margins through higher ticket prices and room rates.
One positive prospect for Vail may come from a bid to attract the 2022 Winter Olympics to the Lake Tahoe area. With the company having bought the Kirkwood Mountain Resort recently, Vail now has three ski areas scattered across the region.
For Vail Resorts to get back on its feet, it needs Mother Nature to start cooperating again. Under more normal winter conditions, the company could see a nice rebound in sales from a disastrous 2011-2012 season.
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.
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