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 Philip Morris International Inc. (NYSE:PM) 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 Philip Morris International Inc. (NYSE:PM).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 6.6% | Fail |
| 1-year revenue growth > 12% | 0.9% | Fail | |
| Margins | Gross margin > 35% | 66.9% | Pass |
| Net margin > 15% | 28% | Pass | |
| Balance sheet | Debt to equity < 50% | NM | NM |
| Current ratio > 1.3 | 0.97 | Fail | |
| Opportunities | Return on equity > 15% | NM | NM |
| Valuation | Normalized P/E < 20 | 20.43 | Fail |
| Dividends | Current yield > 2% | 3.6% | Pass |
| 5-year dividend growth > 10% | 13.1% | Pass | |
| Total score | 4 out of 8 |
Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes. * Four-year growth rate.
Since we looked at Philip Morris International last year, the company has given up three points. Declining shareholder equity was responsible for part of the drop, but a big slowdown in growth, and rising valuations, also contributed. The stock has lagged behind the broader market, gaining just 5% over the past year.
Investors have traditionally seen Philip Morris International Inc. (NYSE:PM) as a way to get exposure to the lucrative tobacco market without the hassles of regulation and legal liability that have plagued its domestically focused peers. In the U.S., the long-term smoking trend has been unmistakably downward, and U.S. tobacco companies have suffered from weaker sales volumes and increasing pressures on overall revenue. Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) have had to let part of their respective workforces go in light of the weakness in the industry.
By comparison, Philip Morris offers growth opportunities around the world, including in many markets where regulation is much less strict, and smoking remains more prevalent. Yet, even abroad, regulatory efforts are starting to pick up steam, as Australia clamps down on cigarette makers with strict packaging guidelines. Many other countries are looking at adopting the Australian model if it proves successful.
Another thing that has hurt Philip Morris is the strong dollar. With its revenue coming in the form of foreign currency, the company has to translate its cash back into U.S. dollars for reporting purposes; when the dollar is strong, its foreign revenue becomes worth fewer dollars, hurting growth.
For Philip Morris International Inc. (NYSE:PM) to improve, it needs to get its shareholder equity back into positive territory and work on growing its earnings to catch up to its pricey valuation. If global regulation rises, though, Philip Morris will have a hard time becoming a perfect stock.
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 Philip Morris International Become the Perfect Stock? originally appeared on Fool.com is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International.
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