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 Emerson Electric Co. (NYSE:EMR) 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:
1). 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.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). 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.
4). Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). 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.
6). 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 Emerson Electric Co. (NYSE:EMR).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 1.7% | Fail |
| 1-year revenue growth > 12% | 2.8% | Fail | |
| Margins | Gross margin > 35% | 40.2% | Pass |
| Net margin > 15% | 8.3% | Fail | |
| Balance sheet | Debt to equity < 50% | 51.4% | Fail |
| Current ratio > 1.3 | 1.40 | Pass | |
| Opportunities | Return on equity > 15% | 20.1% | Pass |
| Valuation | Normalized P/E < 20 | 16.98 | Pass |
| Dividends | Current yield > 2% | 2.9% | Pass |
| 5-year dividend growth > 10% | 8.2% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Emerson Electric last year, the company has held its five-point score for the third year in a row. The stock has put in a similarly modest performance, rising about 10% over the past year.
Emerson has had to deal with changing industry dynamics recently, as consolidation activity rose dramatically in 2012. Eaton Corporation (NYSE:ETN)‘s purchase of Cooper Industries gave the company a lot more presence in Emerson’s key power segment. An even bigger threat may come from General Electric Company (NYSE:GE), which has been working hard to get back to its electrical roots by strengthening its energy infrastructure business. If GE follows through on plans to make a major acquisition in the space, it could pose an even bigger concern for Emerson.
