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Has MKS Instruments Become the Perfect Stock?

By Dan Caplinger - Oct 19, 2012 at 9:43AM

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

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 MKS Instruments (MKSI 6.60%) 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 MKS Instruments.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(2.2%)

Fail

 

1-Year Revenue Growth > 12%

(18.1%)

Fail

Margins

Gross Margin > 35%

44.1%

Pass

 

Net Margin > 15%

12.9%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

10.54

Pass

Opportunities

Return on Equity > 15%

9.6%

Fail

Valuation

Normalized P/E < 20

15.28

Pass

Dividends

Current Yield > 2%

2.7%

Pass

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful; MKS started paying a dividend in May 2011. Total score = number of passes.

Since we looked at MKS Instruments last year, the company has dropped two points, with substantial declines in revenue and net margin. The stock has also failed to deliver on performance, with a slight loss over the past year.

As a manufacturing equipment specialist, MKS helps businesses optimize their processes to boost efficiency and maximize high-quality production. The company has a strong concentration in the semiconductor space, where it counts Samsung, Lam Research (LRCX 6.16%), and Applied Materials (AMAT 4.37%) among its clients.

This time last year, MKS had just announced disappointing guidance for the fourth quarter of 2011. By the time it actually reported for that quarter, though, it blew out analyst estimates by 58%, and followed that up during the first quarter of 2012 with another earnings beat. That sent shares higher in the early part of the year.

But concerns about the health of the economy have brought MKS and some of its peers back down to earth. Competitor Brooks Automation (BRKS 2.78%) had to cut 150 jobs recently after posting disappointing earnings, while Advanced Energy Industries (AEIS 2.40%) has seen weakness both from its semiconductor and solar customers. For its part, MKS missed estimates in the second quarter and sees much lower year-over-year results coming when it reports next week.

For MKS to improve, it needs to find a path back to economic growth. Given the cyclical nature of the business, a recovery should come in time, but MKS needs to position itself to take maximum advantage when it arrives.

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.

Click here to add MKS Instruments to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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Stocks Mentioned

MKS Instruments, Inc. Stock Quote
MKS Instruments, Inc.
MKSI
$105.91 (6.60%) $6.56
Lam Research Corporation Stock Quote
Lam Research Corporation
LRCX
$450.19 (6.16%) $26.11
Advanced Energy Industries, Inc. Stock Quote
Advanced Energy Industries, Inc.
AEIS
$73.94 (2.40%) $1.73
Applied Materials, Inc. Stock Quote
Applied Materials, Inc.
AMAT
$97.36 (4.37%) $4.08
Brooks Automation, Inc. Stock Quote
Brooks Automation, Inc.
BRKS
$74.29 (2.78%) $2.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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