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Has Stryker Become the Perfect Stock?

http://www.fool.com/investing/general/2013/03/21/has-stryker-become-the-perfect-stock.aspx

Dan Caplinger
March 21, 2013

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 Stryker (NYSE: SYK) 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 Stryker.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

7.6%

Fail

 

1-year revenue growth > 12%

4.2%

Fail

Margins

Gross margin > 35%

68.1%

Pass

 

Net margin > 15%

15.0%

Pass

Balance sheet

Debt to equity < 50%

20.5%

Pass

 

Current ratio > 1.3

4.34

Pass

Opportunities

Return on equity > 15%

15.9%

Pass

Valuation

Normalized P/E < 20

21.68

Fail

Dividends

Current yield > 2%

1.6%

Fail

 

5-year dividend growth > 10%

22.3%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Stryker last year, the company has given back the two points it gained from 2011 to 2012. Rising valuations and falling revenue growth cost it the points, but the stock has managed to rise about 20% over the past year.

Like many medical-device makers, Stryker has had to deal with slow sales from cash-strapped hospitals and other medical facilities. It has done its best to grow despite those headwinds, with revenue rising 4% last year, and Stryker believes that an improving economy should make 2013 look more favorable.

But one challenge that has plagued the ind