Has Iridium Communications 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, then decide if Iridium Communications (Nasdaq: IRDM  ) 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 Iridium Communications.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 12.7% Fail
  1-year revenue growth > 12% 8.0% Fail
Margins Gross margin > 35% 67.2% Pass
  Net margin > 15% 11.3% Fail
Balance sheet Debt to equity < 50% 61.6% Fail
  Current ratio > 1.3 1.23 Fail
Opportunities Return on equity > 15% 6.3% Fail
Valuation Normalized P/E < 20 15.05 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total score   2 out of 10

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

Since we looked at Iridium Communications last year, the company's score has fallen by three points. A much uglier balance sheet and far slower revenue growth resulted in the drop, but the stock has actually held up reasonably well over the past year.

For most U.S. consumers, the wireless networks of AT&T, Verizon, and Sprint Nextel (NYSE: S  ) provide enough coverage area to meet most of their needs. Sure, you may find yourself in a dead zone from time to time, but for the most part, being out of touch during those rare times causes only minimal inconvenience.

But for some uses -- ranging from aircraft navigation to deepwater drilling -- cell towers simply aren't an option. That's the niche that Iridium serves, helping its customers stay connected where other solutions fail. Its products, which include both satellite phone hardware as well as Wi-Fi and satellite service, aren't as inexpensive as traditional carriers, but Iridium's network of satellites ensures coverage even in the most remote parts of the world.

The company has an impressive list of customers. Airlines Delta (NYSE: DAL  ) and Continental are among Iridium users, as are numerous government agencies. Energy companies Schlumberger (NYSE: SLB  ) and ConocoPhillips (NYSE: COP  ) use the services as well for machine-to-machine data transmission.

In its most recent quarter, Iridium posted stronger earnings than expected but fell short on sales. Still, the company has a competitive opportunity, as rival Inmarsat has had to increase its prices. If Iridium can capitalize on that opportunity to poach users from Inmarsat, it could be the catalyst to reignite growth and get the company moving back toward perfection.

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.

Iridium Communications isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Iridium Communications 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 in this article. The Motley Fool owns shares of Iridium Communications. Motley Fool newsletter services have recommended buying shares of Schlumberger. 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 (4)

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 May 25, 2012, at 4:12 PM, Synchronism wrote:

    Dan,

    That your article, while it does make good points in stating criteria invaluable to any investment decision, passes over Iridium shows how misleading pure, quantitative screeners can be.

    Your tool does not consider Iridium's subscriber growth, the growth of the MSS Industry (both user base and revenues), its future prospects on 2015 and beyond, and even the reasons behind the "disappointing" net margins -- you'd find that one little adjustment to the P/E Ratio reveals something that far, far lower than 15x.

    The painting of IRDM's debt situation is actually better than what the screener makes it out to be but I have yet to work out the numbers in my spreadsheet (b/c I'm busy studying for my series 65). I'm certain that ROE figure you have there does not reflect the reality of IRDM's situation.

    However, I do have to thank you for giving me some names to bank on for its customer base. Knowing Delta, Continental, and ConocoPhillips (I don't know Schlumberger, sadly) are customers aside from the US DOD adds confidence to my analysis.

    Yours,

    Synchronism

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1891823, ~/Articles/ArticleHandler.aspx, 12/21/2014 10:00:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement