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Has Neogen Become the Perfect Stock?

By Dan Caplinger - Dec 26, 2012 at 6:00PM

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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 Neogen (NEOG -1.57%) 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 Neogen.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

15.6%

Pass

 

1-year revenue growth > 12%

9.9%

Fail

Margins

Gross margin > 35%

51.9%

Pass

 

Net margin > 15%

12.8%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

8.33

Pass

Opportunities

Return on equity > 15%

11.2%

Fail

Valuation

Normalized P/E < 20

47.46

Fail

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 Neogen last year, the company has kept its four-point score. The stock has done even better, giving shareholders a 50% gain over the past year.

Neogen is a small company that focuses on diagnostic tests for food safety and animal health. Given rising concerns over the safety of the U.S. food supply in light of high-profile incidents, Neogen's business has plenty of potential. The salmonella outbreak at a peanut and peanut butter plant that forced producer Sunland to recall products from a variety of stores -- including Whole Foods (WFM), Target (TGT 4.57%), and Costco (COST 1.33%) -- is just one example of the many foodborne illness incidents that have occurred in recent years.

Throughout the year, Neogen has been executing well. In each of the past two quarters, the company has managed to produce strong results, with a 30% gain in net income in its most recent quarter. Gains from rodent-killing agents and food allergen diagnostic tests were among the products the company cited as responsible for the overall results, and margins expanded nicely compared to the year-ago quarter.

Still, competitor Meridian Bioscience (VIVO 0.27%) has many of the same attractive qualities and pays a nearly 4% dividend yield as well. With its own diagnostic tests, including a newly FDA-cleared test for Group A streptococcus, Meridian will pose a threat to Neogen as both companies seek to take maximum advantage of current opportunities.

For Neogen to improve, it needs to focus on boosting sales and continuing to seek higher margins. If it can do so, though, Neogen has plenty of potential to get closer to perfection in the 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.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco and Whole Foods. Motley Fool newsletter services recommend Costco and Whole Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Neogen Corporation Stock Quote
Neogen Corporation
NEOG
$21.93 (-1.57%) $0.35
Target Corporation Stock Quote
Target Corporation
TGT
$180.19 (4.57%) $7.88
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$553.02 (1.33%) $7.27
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
Meridian Bioscience, Inc. Stock Quote
Meridian Bioscience, Inc.
VIVO
$33.00 (0.27%) $0.09

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

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