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 Mueller Water (NYSE: MWA ) 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 Mueller Water.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(6.2%)||Fail|
|1-Year Revenue Growth > 12%||30.2%||Pass|
|Margins||Gross Margin > 35%||17.9%||Fail|
|Net Margin > 15%||(8.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||234.2%||Fail|
|Current Ratio > 1.3||3.21||Pass|
|Opportunities||Return on Equity > 15%||(13.0%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||5.9%||Fail|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Mueller Water last year, the company hasn't managed to improve its two-point score. With an 80% jump in its stock price, though, investors aren't complaining about Mueller's lack of progress on this 10-point scale.
The water industry is becoming increasingly important as populations in parched areas of the world are on the rise. Water utilities Aqua America (NYSE: WTR ) and American Water Works (NYSE: AWK ) have consolidated into large networks across the country, while Veolia Environnement (NYSE: VE ) has particular expertise on the wastewater side of the equation. For its part, Mueller seeks to help the effort to fight thirst by making pipes, liners, and other materials to upgrade and repair aging water infrastructure.
Unfortunately, Mueller has struggled for several years, largely because it depends on municipalities to step up and take on the often costly expense of making water and sewer repairs. Given the collapse in the housing market and the resulting loss of local tax revenue, cities and towns have been tightening their belts, and that has hurt Mueller.
But, in its most recent quarter, Mueller posted strong results, with sales growth of 6% and a quarterly profit of $0.05 per share reversing a year-ago loss and beating analyst expectations. With CEO Greg Hyland pointing to a possible bottom in the housing market, Mueller is clearly counting on continued improvement in the economy to help boost its future returns.
One area of potential growth may be in energy. Heckmann (NYSE: HEK ) has made a business of providing water services for hydraulic fracturing, and given how lucrative that industry is, Mueller might benefit from getting involved.
For Mueller to improve, it needs to get profitable and start working on getting debt under control. Until that happens, Mueller won't make much progress toward becoming a perfect stock.
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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