Is Sprint the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Sprint Nextel (NYSE: S  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.

  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.

  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.

  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Sprint.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.4% fail
  1-Year Revenue Growth > 12% (2.1%) fail
Margins Gross Margin > 35% 47.1% pass
  Net Margin > 15% (10.9%) fail
Balance Sheet Debt to Equity < 50% 130.0% fail
  Current Ratio > 1.3 1.23 fail
Opportunities Return on Equity > 15% (20.8%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0.0% fail
  5-Year Dividend Growth > 10% 0.0% fail
       
  Total Score   1 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Sprint had negative earnings during the period. Total score = number of passes.

With a score of 1, Sprint is about as far from perfect as you can get. Unfortunately, the company simply hasn't been able to handle the competitive pressures it has faced in recent years.

To outsiders, Sprint may look like it's ahead of the game. With the help of Clearwire (Nasdaq: CLWR  ) , it claims to have the world's first 4G network. But its decision to go with a WiMAX network rather the rival LTE technology that AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) plan to use for their coming 4G entries could come back to haunt it. Clearwire continues to hemorrhage cash and recently issued a warning about its ability to continue as a going concern, prompting worries Sprint may have to bail it out.

Meanwhile, Sprint isn't exactly in a position to clean up any messes right now. It doesn't pay a dividend like most of its telecom competitors and has an ugly balance sheet. Some think its last hope might be a combination with Deutsche Telecom's T-Mobile, since Sprint has the 4G spectrum that T-Mobile needs, and T-Mobile would bring critical mass back to Sprint's subscriber base.

At this point, investors looking for growth from mobile technology would be better served by Google (Nasdaq: GOOG  ) and its ability to continue growing search use through its booming Android franchise. Sprint may yet survive, but it's not likely to become the perfect stock anytime soon.

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 Sprint 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 Fool owns shares of Google, which is a Motley Fool Inside Value recommendation and a Motley Fool Rule Breakers choice. Sprint is a former Inside Value pick. 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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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 November 22, 2010, at 11:15 PM, Proud2bb wrote:

    I think that you can stop beating this dead horse.... this artical reminds me of bashing on a message board. This article makes it sound like S will be in BK tomorrow!!! if your going to report on a company do it with class and not basher style!!! Do they have anything going or them?

  • Report this Comment On November 25, 2010, at 12:42 PM, locololo2 wrote:

    Why does this series of articles focus on terrible stocks you should not buy rather than stocks that are worth buying?

    Instead of sending out an article on a 1/10 stock based on your scale, how about a 8, 9 or 10 /10 on your scale?

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