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 and then decide whether Agrium Inc. (USA) (NYSE:AGU) 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.
Moneymaking 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 Agrium Inc. (USA) (NYSE:AGU).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 25.9% | Pass |
| 1-year revenue growth > 12% | 7.9% | Fail | |
| Margins | Gross margin > 35% | 26.9% | Fail |
| Net margin > 15% | 9% | Fail | |
| Balance sheet | Debt to equity < 50% | 57.2% | Fail |
| Current ratio > 1.3 | 1.54 | Pass | |
| Opportunities | Return on equity > 15% | 22.4% | Pass |
| Valuation | Normalized P/E < 20 | 12.94 | Pass |
| Dividends | Current yield > 2% | 1.9% | Fail |
| 5-year dividend growth > 10% | 55.5% | Pass | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Agrium last year, the company gave back two of the three points it gained from 2011 to 2012, as revenue growth slowed and debt-to-equity rose. But the shares have done quite well, rising almost 30% over the past year.
Agrium gives investors the best of both worlds in the fertilizer industry. As part of a three-company consortium alongside Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS), Agrium Inc. (USA) (NYSE:AGU) benefits when potash-based fertilizers are performing well. But unlike Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS), Agrium also has nitrogen-based production capacity, which has come in especially handy recently because of extremely low natural-gas prices that make it cheaper to produce nitrogen-based fertilizers than other fertilizer types. Those conditions have given Terra Nitrogen Company, L.P. (NYSE:TNH) and CVR Partners, as well as Agrium, a competitive advantage over pure potash producers. Moreover, Agrium has its own retail outlets, giving farm customers a face to put with its products.
