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 DineEquity (NYSE: DIN) 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 DineEquity.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 27.8% Pass
  1-Year Revenue Growth > 12% (13.2%) Fail
Margins Gross Margin > 35% 36.5% Pass
  Net Margin > 15% (0.5%) Fail
Balance Sheet Debt to Equity < 50% 1462.1% Fail
  Current Ratio > 1.3 1.20 Fail
Opportunities Return on Equity > 15% (3.1%) Fail
Valuation Normalized P/E < 20 13.73 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With just three points, DineEquity isn't making its shareholders feel rooty, tooty, fresh, or fruity. The restaurant stock has a lot of obstacles to overcome in a very tough industry.

DineEquity combines two popular casual dining chains: Applebee's and IHOP. But casual dining has been a tough industry lately, as competitors like Brinker International (NYSE: EAT) and Darden Restaurants (NYSE: DRI) have had to deal with everything from Groupon discounts at local establishments and rising input costs, to terrible weather and a lack of discretionary cash. While more expensive eateries such as Ruth's Chris Steakhouse of Ruth's Hospitality (Nasdaq: RUTH) have more brand loyalty, it's easy for customers to switch from IHOP or Applebee's to similar discount food options.

Unfortunately, what DineEquity has a lot of is debt. The $800 million market-cap company has almost $1.9 billion in debt on its balance sheet, whereas Buffalo Wild Wings (Nasdaq: BWLD) maintains a debt-free business. Although DineEquity managed to refinance its debt last year, buying itself time until 2017 and 2018, it still faces an uphill battle to get its finances under control.

At least for now, DineEquity isn't getting that job done. In its most recent quarter, the company saw revenue decline and earnings fall below analysts' expectations. Although the company posted positive free cash flow for the past 12 months, it'll take a lot more to get DineEquity back on track for good.

DineEquity isn't perfect, and with its debt load, consistent losses, and no dividend, it's unlikely to get that way anytime soon. The company might be good for some yummy pancakes, but those seeking an appetizing investment should look elsewhere.

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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article.

Motley Fool newsletter services have recommended buying shares of Buffalo Wild Wings. 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 Fool has a disclosure policy.