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 Philip Morris International (NYS: PM) 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 Philip Morris International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.4%||Fail|
|1-Year Revenue Growth > 12%||14.3%||Pass|
|Margins||Gross Margin > 35%||65.7%||Pass|
|Net Margin > 15%||27.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||1051.9%||Fail|
|Current Ratio > 1.3||1.00||Fail|
|Opportunities||Return on Equity > 15%||258.0%||Pass|
|Valuation||Normalized P/E < 20||19.71||Pass|
|Dividends||Current Yield > 2%||3.5%||Pass|
|5-Year Dividend Growth > 10%||13.7%*||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes. * Four-year growth rate.
Since we looked at Philip Morris International last year, the company has picked up a point. Faster revenue growth this year proved the difference, but the tobacco maker could face some headwinds this year and beyond.
Tobacco stocks have run hot and cold over the years, as ever-strong demand occasionally runs into litigation risk or regulatory hurdles. Domestically, Lorillard (NYS: LO) and Reynolds American (NYS: RAI) succeeded in getting a law struck down that would have required huge warning labels on cigarette packaging. Big campaigns like the CDC's coming $54 million, three-month ad onslaught seek to get customers to stop buying the product. Lately, industry fundamentals have weakened even as shares continue to rise. Altria (NYS: MO) plans to implement a 15% workforce cut, while Reynolds American will do a 10% cut for cost reduction.
Because of its overseas presence, Philip Morris avoids many of these regulatory problems. The company doesn't get off scot-free, as foreign governments like Australia's are trying to impose similar restrictions to what the U.S. sought. British American Tobacco (ASE: BTI) would also be affected, and both it and Philip Morris have vowed to fight Australia's move to defend their brands.
One possible problem facing Philip Morris is its large European exposure. The company gets about 65% of its revenue from Europe, so if a crisis were to hit the Continent, Philip Morris could tumble -- assuming, of course, that customers would respond to tough times by smoking less rather than more.
For Philip Morris to improve on its current score, it needs to get its balance sheet in order. Once it does that, though, then all it needs is some freedom in emerging economies to continue its growth trajectory higher -- and reap the profits.
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.
Philip Morris International isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Philip Morris International to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Philip Morris International. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.