Has PotashCorp Become the Perfect Stock?

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 PotashCorp (NYS: POT) 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 PotashCorp.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

11.9%

Fail

 

1-Year Revenue Growth > 12%

(5.6%)

Fail

Margins

Gross Margin > 35%

48.3%

Pass

 

Net Margin > 15%

30.5%

Pass

Balance Sheet

Debt to Equity < 50%

42.2%

Pass

 

Current Ratio > 1.3

1.46

Pass

Opportunities

Return on Equity > 15%

27.5%

Pass

Valuation

Normalized P/E < 20

15.67

Pass

Dividends

Current Yield > 2%

2.1%

Pass

 

5-Year Dividend Growth > 10%

41.1%

Pass

       
 

Total Score

 

8 out of 10

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

Since we looked at PotashCorp last year, the company has picked up another point, adding to its gains from 2010 to 2011. A big boost in the stock's dividend helped its score, but the share price has languished, falling about 15% over the past year.

The fertilizer industry has been a red-hot area for investors for years. As farm commodity prices have risen, farmers have had more money to invest in crop-yield-enhancing products like fertilizer, and PotashCorp and fellow potash producer Mosaic (NYS: MOS) have profited from that trend.

More recently, though, PotashCorp and its mineral-based-fertilizer peers have faced a new challenge from nitrogen-fertilizer producers. Because natural gas prices have been so low, Terra Nitrogen (NYS: TNH) and CVR Partners (NYS: UAN) have taken advantage of cheap input costs to earn big profits on nitrogen-based fertilizers. Agrium (NYS: AGU) , which has its feet in both potash and nitrogen-based fertilizer, has seen the nitrogen side of its business really help its bottom line lately.

In its most recent quarter, PotashCorp gave investors more bad news, guiding full-year earnings down to the lower end of its previous estimates and citing delays in lucrative contracts to emerging nations China and India.

For PotashCorp to recover, it only needs for natural gas prices to start rising, as they already have. Once that trend takes over, nitrogen fertilizers will lose their competitive advantage, and the trend toward farm productivity enhancement should push PotashCorp back into the limelight again.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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