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Has ITT Become the Perfect Stock?

Dan Caplinger
July 12, 2012

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 ITT (NYSE: ITT  ) 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 ITT.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (23.2%) Fail
  1-Year Revenue Growth > 12% 11.1% Fail
Margins Gross Margin > 35% 30.5% Fail
  Net Margin > 15% (11.5%) Fail
Balance Sheet Debt to Equity < 50% 3.2% Pass
  Current Ratio > 1.3 2.01 Pass
Opportunities Return on Equity > 15% (19.9%) Fail
Valuation Normalized P/E < 20 13.36 Pass
Dividends Current Yield > 2% 2.1% Pass
  5-Year Dividend Growth > 10% 4.7% Fail
  Total Score   4 out of 10

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

Since we looked at ITT last year, the company has kept its four-point score. But the company looks far different from how it did back then, with its having spun off several of its businesses.

The big news for ITT in the past year was its spinoff of Exelis and Xylem (NYSE: XYL  ) back in October. Exelis took on ITT's former defense and aerospace business, with its manufacturing products like air traffic control technology, night vision goggles, and satellite imaging systems. Xylem, meanwhile, now represents ITT's old water infrastructure business, which made pumps, pipes, valves, and other equipment for transporting drinkable water. Both spun-off companies issued debt in order to pay a special dividend back to ITT in connection with the transactions.