Has Sun Hydraulics 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 Sun Hydraulics (NAS: SNHY) 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 Sun Hydraulics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.1%

Fail

 

1-Year Revenue Growth > 12%

3.2%

Fail

Margins

Gross Margin > 35%

39.4%

Pass

 

Net Margin > 15%

17.8%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

8.94

Pass

Opportunities

Return on Equity > 15%

23.3%

Pass

Valuation

Normalized P/E < 20

19.37

Pass

Dividends

Current Yield > 2%

1.9%

Fail

 

5-Year Dividend Growth > 10%

14.1%

Pass

       
 

Total Score

 

7 out of 10

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

Since we looked at Sun Hydraulics last year, the company dropped a point, as revenue growth slowed. The stock has also had lackluster performance over the past year, losing about 10% of its share price.

Some companies don't make it into the limelight very often, yet they go about their business putting up solid numbers. Sun Hydraulics is a good example of this, selling components used in hydraulic systems for a variety of types of industrial machinery.

Sun doesn't have any shortage of competition, with much-larger players Eaton (NYS: ETN) , Parker Hannifin (NYS: PH) , and Sauer-Danfoss (NYS: SHS) all actively participating in various aspects of the hydraulic power systems industry. Yet Sun has managed to outshine all of them by combining a surge in revenue with net margins that put the rest of the industry to shame.

For the most part, Sun has done a good job of having its success fall through to the bottom line. Although it missed earnings estimates in the fourth quarter of 2011, it has since posted two straight earnings beats, with continuing margin expansion contributing to net income. Although some might worry that Sun occupies such a small niche that it's vulnerable to changing trends, Sun has a strong reputation that suggests customer loyalty may be stronger than many fear.

In its most recent quarter, though, both revenue and earnings fell year-over-year, with the company missing earnings estimates and guiding its fourth-quarter revenue and earnings-per-share downward as well. That sent shares tumbling, as investors worry about the company's future growth in a slowing economy.

For Sun to improve, it needs to boost its dividend a tiny bit more and seek out stronger sources of growth. If it can do that, Sun could reach perfection in short order.

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

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Sun Hydraulics. Motley Fool newsletter services recommend Sun Hydraulics. 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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