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 Rockwell Automation
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 Rockwell Automation.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 5.6% | Fail |
| 1-Year Revenue Growth > 12% | 13.8% | Pass | |
| Margins | Gross Margin > 35% | 40.4% | Pass |
| Net Margin > 15% | 11.8% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 57.3% | Fail |
| Current Ratio > 1.3 | 4.14 | Pass | |
| Opportunities | Return on Equity > 15% | 37.6% | Pass |
| Valuation | Normalized P/E < 20 | 18.25 | Pass |
| Dividends | Current Yield > 2% | 2.3% | Pass |
| 5-Year Dividend Growth > 10% | 7.9% | Fail | |
| Total Score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Rockwell Automation last year, the company has seen its score jump two points. A share-price decline has helped boost the company's dividend yield and cut its earnings multiple, but the company still faces challenges ahead.
As its name suggests, Rockwell's business is to help other companies automate certain parts of their operations, making them more efficient and productive. Although robotic manufacturing plants may be the first thing that comes to mind, a range of automated processes has been useful in the telecom, medical, and financial industries as well. Demand has been strong enough that competitors Emerson Electric
Although developed markets give Rockwell plenty of business, the big area for potential growth is in emerging markets. But Rockwell isn't alone in focusing on those high-growth areas. The ubiquitous Siemens
In its most recent quarter, Rockwell posted revenue and earnings growth, but the results missed analyst expectations. Shares fell in response, despite the company's reaffirming its guidance for the 2012 fiscal year.
Rockwell needs solid emerging-market economic growth to support its business. Without that, its expansion plans could fall short of the company's hopes -- but with it, Rockwell could see a resurgence of revenue and profit gains in the near future.
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.
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