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 GlaxoSmithKline plc (NYSE:GSK) 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 GlaxoSmithKline.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||3.1%||Fail|
|1-year revenue growth > 12%||(3.5%)||Pass|
|Margins||Gross margin > 35%||70.1%||Pass|
|Net margin > 15%||17.3%||Pass|
|Balance sheet||Debt to equity < 50%||271.3%||Fail|
|Current ratio > 1.3||0.99||Fail|
|Opportunities||Return on equity > 15%||60.9%||Pass|
|Valuation||Normalized P/E < 20||17.98||Pass|
|Dividends||Current yield > 2%||5%||Pass|
|5-year dividend growth > 10%||7.3%||Fail|
|Total score||5 out of 10|
Since we looked at GlaxoSmithKline last year, the company gained back the point it lost from 2011 to 2012, as net margins rose. But the stock has been stuck in the doldrums, roughly unchanged over the past year.
The big news for Glaxo this year is that it finally managed to buy out longtime target Human Genome Sciences. By raising its bid slightly, Glaxo was able to avoid a potential bidding war with Celgene Corporation (NASDAQ:CELG) and acquire the rights to promising lupus drug Benlysta, with which it had worked for years alongside Human Genome Sciences as a marketing partner. It also picked up some other promising drug candidates in late-stage trials as well.
But Benlysta could see further competition in the near future. Eli Lilly & Co. (NYSE:LLY) recently decided to drop development of its tabalumab drug for rheumatoid arthritis, but the company still hopes the drug can become a viable treatment for lupus.
That has Glaxo looking for new growth opportunities. Emerging markets are one prospect, and last month, Glaxo announced a joint venture with an Indian company specializing in vaccines to develop an all-purpose vaccine against polio and other deadly diseases like hepatitis B and whooping cough. In addition, its COPD treatment LAMA/LABA, which it licenses from Theravance Inc (NASDAQ:THRX) , could be a strong successor to Glaxo’s Advair, which has come off-patent and now has Teva Pharmaceutical Industries Ltd (NYSE:TEVA) looking to produce a generic version to compete.
With six drugs under review in 2013, including treatments for HIV, skin cancer, and type 2 diabetes, this year will be pivotal for Glaxo. If the pipeline can lead to more approvals, then Glaxo could finally break out of its long share-price slump and move higher.
For Glaxo to improve, it needs to get sales moving in the right direction and work on strengthening its balance sheet. If Europe turns around, then Glaxo will be in a strong position to take advantage and move close to perfection.
The article Has GlaxoSmithKline 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 has no position in any of the stocks mentioned.
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