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 Dean Foods Co (NYSE:DF) 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 Dean Foods.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (0.6%) | Fail |
| 1-year revenue growth > 12% | (1.5%)* | Fail | |
| Margins | Gross margin > 35% | 25.4% | Fail |
| Net margin > 15% | 1.5% | Fail | |
| Balance sheet | Debt to equity < 50% | 664.5% | Fail |
| Current ratio > 1.3 | 1.67 | Pass | |
| Opportunities | Return on equity > 15% | 68.6% | Pass |
| Valuation | Normalized P/E < 20 | 18.70 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. * Adjusted to reflect WhiteWave IPO.
Since we looked at Dean Foods last year, the company has picked up a point, with return on equity rebounding sharply. The stock has seen great performance as well, climbing more than 35% over the past year.
Facing a huge debt load, Dean Foods Co has made some big strategic moves recently to try to shore up its balance sheet. By making an initial public offering of a stake in its The WhiteWave Foods Co (NYSE:WWAV) organic foods division in October, Dean took advantage of the segment’s high growth rate and set the stage for a full spinoff of Dean’s remaining 80% stake in WhiteWave. Then, in December, Dean sold off its Morningstar Foods business for $1.45 billion to Canada’s Saputo. The proceeds from these transactions will help Dean pay down its borrowings from their lofty levels.
Dean also managed to overcome some other big challenges. High feed prices from the summer’s drought in the Midwest raised costs and squeezed margins. Moreover, during the fiscal cliff debate at the end of 2012, the “dairy cliff” crisis also arose, as a failure to renew key legislation could have resulted in a doubling of milk prices that would have crushed demand. The farm-bill crisis was eventually averted, and Dean managed to streamline its operations to cut costs as much as possible. But consolidation in the industry has left Dean having to fight with fellow giants The Kroger Co. (NYSE:KR) and Kraft Foods Group Inc (NASDAQ:KRFT) , and all three have seen their dairy operations suffer from the overall trend toward reduced milk consumption, which has declined 30% since 1975.
In its most recent earnings report, Dean didn’t raise much enthusiasm. The company guided its 2013 earnings projections downward despite beating estimates for the fourth quarter of 2012, and shares sank in response.
For Dean to improve, it needs to find a way to jump-start its growth prospects. With the company having sold off its fastest-growing segments, however, it’ll be a tall order to get Dean moving toward perfection in the near future.
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.
The article Has Dean Foods Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods and WhiteWave Foods.
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