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Has Rofin-Sinar Technologies Become the Perfect Stock?

By Dan Caplinger - Nov 2, 2012 at 8:29PM

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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 Rofin-Sinar Technologies (RSTI) 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 a 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 Rofin-Sinar Technologies.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.9%

Fail

 

1-Year Revenue Growth > 12%

1.7%

Fail

Margins

Gross Margin > 35%

36.5%

Pass

 

Net Margin > 15%

7.4%

Fail

Balance Sheet

Debt to Equity < 50%

3.4%

Pass

 

Current Ratio > 1.3

3.88

Pass

Opportunities

Return on Equity > 15%

8.8%

Fail

Valuation

Normalized P/E < 20

13.58

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at Rofin-Sinar Technologies last year, the company has dropped a point, with revenue growth decelerating sharply. The stock has also gotten chopped up lately, with shares down nearly 30% over the past year.

Rofin-Sinar is a laser manufacturer that focuses on helping the auto industry with metal cutting and welding, as well as semiconductor marking and other fine micro-level applications in industries like solar and medical device technology. Based in Michigan, the company is well-located to serve the U.S. auto industry.

But Rofin-Sinar faces a couple of big challenges. Competition from Coherent (COHR -0.88%) and Newport (NASDAQ: NEWP) in certain niches of the market have prevented Rofin-Sinar from having free rein to capture new types of business. More importantly, Rofin-Sinar's carbon-based lasers have proven vulnerable to disruptive technology from IPG Photonics (IPGP -1.63%) and its fiber-optic lasers, with Newport and JDS Uniphase (VIAV -1.52%) seeking to get increasingly involved in the fiber-laser industry. As a result, IPG Photonics trades near a 52-week high, while Rofin-Sinar and its standard-laser peers haven't been able to keep up.

For Rofin-Sinar to improve, it really needs to step up its game and find innovative ways to get more promising laser technology into its product offerings. Without it, the company could get left behind and stand little chance of ever becoming a perfect stock.

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 Rofin-Sinar Technologies to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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Stocks Mentioned

Rofin-Sinar Technologies Inc. Stock Quote
Rofin-Sinar Technologies Inc.
RSTI
Viavi Solutions Inc. Stock Quote
Viavi Solutions Inc.
VIAV
$14.29 (-1.52%) $0.22
IPG Photonics Corporation Stock Quote
IPG Photonics Corporation
IPGP
$98.35 (-1.63%) $-1.63
Coherent, Inc. Stock Quote
Coherent, Inc.
COHR
$263.39 (-0.88%) $-2.34

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

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