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 InterMune (NAS: ITMN) 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 InterMune.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(20.1%)||Fail|
|1-Year Revenue Growth > 12%||(89.1%)||Fail|
|Margins||Gross Margin > 35%||67.0%||Pass|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||153.2%||Fail|
|Current Ratio > 1.3||9.95||Pass|
|Opportunities||Return on Equity > 15%||(102.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to substantial negative net income. Total score = number of passes.
Since we looked at InterMune last year, the company has declined sharply, losing four points. A big reversal in sales and profitability is to blame for the move, as a one-time sale last year left InterMune relying on a single lead drug.
InterMune has struggled ever since its lung-treatment drug pirfenidone, now branded as Esbriet, got rejected by the FDA two years ago. The rejection was somewhat of a surprise after an FDA advisory panel had recommended approval. But thus far, InterMune has focused on trying to ramp up sales of the drug in Europe, where the analogous regulatory authorities approved it.
Late last month, InterMune's stock took a big hit after its quarterly earnings release gave investors a big disappointment. Even with Esbriet posting some sales in the European Union, revenue came in at just $8.9 million, as the company haggles with German government authorities over pricing. In any event, that's not the growth that investors have hoped for, and it's a big part of why the stock has lost around three-quarters of its value in the past year.
It's unclear whether the company could successfully reapply for FDA approval. Cell Therapeutics (NAS: CTIC) is looking for a second chance after the FDA rejected its lymphoma treatment pixantrone but opened the door for another look. Vivus (NAS: VVUS) has actually succeeded in getting a positive FDA advisory panel recommendation for its Qnexa obesity drug, despite a previous FDA rejection back in 2010. Although InterMune's ASCEND phase 3 trial might provide new evidence to support approval, that's far from certain at this point.
This time last year, speculation had arisen that Teva Pharmaceutical (NAS: TEVA) or AstraZeneca (NYS: AZN) might offer to buy out InterMune. Unfortunately for investors, those plans haven't panned out even at much lower prices. To improve, InterMune needs to find a way to get Esbriet or some other drug onto the U.S. market -- and the sooner, the better.
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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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 Teva Pharmaceutical. 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.
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