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 IMAX 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 IMAX.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

19.5%

Pass

 

1-year revenue growth > 12%

13.9%

Pass

Margins

Gross margin > 35%

50.9%

Pass

 

Net margin > 15%

12.9%

Fail

Balance sheet

Debt to equity < 50%

12.6%

Pass

 

Current ratio > 1.3

1.95

Pass

Opportunities

Return on equity > 15%

16.7%

Pass

Valuation

Normalized P/E < 20

57.29

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

6 out of 10

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

Since we looked at IMAX last year, the company gained back the point it lost from 2011 to 2012. The stock has put in reasonable performance, rising about 10% over the past year.

2012 was an extremely strong year for the movie industry, with gross U.S. ticket sales reaching a record $10.8 billion. The number of tickets sold increased for the first time in three years, and while paying customer counts were still well below record levels, higher prices made the difference. IMAX scored particularly well on blockbuster hits from the major studios, with Disney's  "Avengers," Time Warner and its "The Dark Knight Rises," and "The Hunger Games" from Lionsgate helping to drive customers into premium IMAX theaters.

But what's really driving IMAX's potential is that studios are starting to get on board with exclusive IMAX-format content and other differentiators. With Time Warner's Warner Bros. Pictures signing on to provide 20 films over the next three years for IMAX, the theater's network will continue to provide unique value to studios and moviegoers alike.

Moreover, IMAX is continuing to push into emerging markets. With dozens of theaters lined up for emerging markets from Russia and China to South Korea and India, IMAX has spread across the globe and will continue to build out its worldwide network in the years to come.

Not everything has gone perfectly for IMAX, as 3-D movies haven't done as well as some had hoped. Yet by holding back RealD , the 3-D flop has actually helped IMAX retain its competitive moat, as its experience is more than adequate even in 2-D.

For IMAX to improve, it needs to get net margins up just a bit and then work on getting its earnings to catch up to its pricey valuation. With plenty of growth ahead, IMAX has a clear road to take advantage of Hollywood entertainment well into 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.

Disney's recent acquisition of Lucasfilm could give IMAX more blockbusters down the road. Find out whether Disney's stock is the better buy by reading our premium research report on the entertainment giant. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. We're also providing a full year of regular analyst updates as news develops, so don't miss out -- simply click here now to claim your copy today.

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

The article Has IMAX Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of IMAX and Walt Disney. 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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