Is Bio-Reference Labs the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Dan Caplinger
Dan Caplinger
Sep 4, 2012 at 12:00AM
Other

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 Bio-Reference Labs (Nasdaq: BRLI) 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 Bio-Reference Labs.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.1% Pass
  1-Year Revenue Growth > 12% 19.3% Pass
Margins Gross Margin > 35% 50.7% Pass
  Net Margin > 15% 6.8% Fail
Balance Sheet Debt to Equity < 50% 11.2% Pass
  Current Ratio > 1.3 3.72 Pass
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 16.88 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   7 out of 10

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

With seven points, Bio-Reference Labs performs very well on our scale. The stock has also done pretty well, rising 25% in the past year despite a recent pullback.

Bio-Reference Labs operates in the rapidly growing area of clinical diagnostic testing. With many health providers having outsourced lab work outside their offices, industry giants Quest Diagnostics (NYSE: DGX) and LabCorp (NYSE: LH) have taken full advantage of the opportunity. Despite their efforts, though, they haven't locked out smaller players like Bio-Reference.

Bio-Reference has had a tumultuous year. Last November, the company found itself targeted by the short-selling investigator Street Sweeper, sending its shares tumbling nearly 40% in just two weeks. But the company announced a share buyback, and strong earnings in subsequent quarters dispelled most investors' concerns.

Last week, Bio-Reference suffered a setback. The company's fiscal third-quarter report saw sales rise 16% and earnings jump 25% from a year ago. But revenue came in short of expectations, and future guidance wasn't enough to make investors happy, sending the stock down as much as 10% the day of the release. With an increasing percentage of revenue coming from commercial health insurance carriers rather than billing of medical professionals or patients, Bio-Reference needs to pay close attention to the moves that insurance giants UnitedHealth (NYSE: UNH), WellPoint (NYSE: WLP), and others are making in response to health-care reform.

For Bio-Reference Labs to improve, it needs to work on boosting its net margins and considering a dividend. For now, though, growth is the order of the day, and so shareholders shouldn't expect a march to perfection 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.

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