Has Dendreon Become the Perfect Stock?
byJul 27th 2012 9:59AM
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 Dendreon (NAS: DNDN) 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 Dendreon.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||313.5%||Pass|
|1-Year Revenue Growth > 12%||428.5%||Pass|
|Margins||Gross Margin > 35%||49.4%||Pass|
|Net Margin > 15%||(82.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||205.3%||Fail|
|Current Ratio > 1.3||7.35||Pass|
|Opportunities||Return on Equity > 15%||(81.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Dendreon last year, the company has kept its four-point score. Despite continuing sales success, the biotech hasn't managed to convert revenue to profits, and that's why shares have tumbled more than 80% over the past year.
Dendreon soared two years ago when its Provenge treatment for prostate cancer received FDA approval. Despite some initial challenges to get the $93,000 treatment approved for medical reimbursement, Medicare ruled last year that charges were reasonable and necessary, and health insurers Aetna (NYS: AET) and Humana followed suit.
But concerns have still held back sales, and that has caused the stock to plunge. Some have turned to Johnson & Johnson's (NYS: JNJ) Zytiga as a cheaper treatment, while Medivation's (NAS: MDVN) enzalutamide could also prove useful in treating patients. Additional competition from Sanofi (NYS: SNY) and its Jevtana drug only adds to the pressures that Dendreon faces in trying to get its foot in the door among prescribing doctors.
Dendreon insists that if it can get to $500 million in annual sales, it can finally become profitable. For now, though, the pace of growth is much slower than investors want to see, and it could be next year before Dendreon gets to a $500 million sales rate.
For Dendreon to improve, it needs to surmount doctors' reluctance to recommend Provenge. In addition, cutting costs could go a long way toward helping it make the most of its revenue growth and get more of that money to fall down to the bottom line. With its big potential, Dendreon should eventually get a lot closer to perfection than it is right now.
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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The article Has Dendreon Become the Perfect Stock? originally appeared on Fool.com.Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Johnson & Johnson. 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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