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Has Georgia Gulf Become the Perfect Stock?

http://www.fool.com/investing/general/2012/08/17/has-georgia-gulf-become-the-perfect-stock.aspx

Dan Caplinger
August 17, 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 Georgia Gulf (NYSE: GGC  ) 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 Georgia Gulf.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.4% Fail
  1-Year Revenue Growth > 12% 8.5% Fail
Margins Gross Margin > 35% 10.1% Fail
  Net Margin > 15% 2.4% Fail
Balance Sheet Debt to Equity < 50% 112.3% Fail
  Current Ratio > 1.3 2.44 Pass
Opportunities Return on Equity > 15% 15.7% Pass
Valuation Normalized P/E < 20 22.38 Fail
Dividends Current Yield > 2% 0.9% Fail
  5-Year Dividend Growth > 10% (60.2%) Fail
       
  Total Score   2 out of 10

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

Since we looked at Georgia Gulf last year, the company has seen its score cut in half. Weaker revenue growth played a role in the drop, but the explosion in the share price has pushed valuations much higher, with the stock having almost doubled in the past year.

Georgia Gulf makes a variety of industrial chemicals, including materials for construction and home improvement. But most of the focus on the company over the past year has been merger-related, as Westlake Chemical (NYSE: WLK  ) made a bid for the company back in January. After a long series of back-and-forth offers and rejections, Westlake finally dropped its bid in May.

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