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Has TAL International Become the Perfect Stock?

Sunday - 2/24/2013, 11:00pm  ET

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 TAL International 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 TAL International.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

11.4%

Fail

 

1-year revenue growth > 12%

14%

Pass

Margins

Gross margin > 35%

86.7%

Pass

 

Net margin > 15%

22.1%

Pass

Balance sheet

Debt to equity < 50%

428.4%

Fail

 

Current ratio > 1.3

0.64

Fail

Opportunities

Return on equity > 15%

22.1%

Pass

Valuation

Normalized P/E < 20

11.41

Pass

Dividends

Current yield > 2%

6%

Pass

 

5-year dividend growth > 10%

10.4%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at TAL International last year, the company has dropped a point, as its balance sheet condition deteriorated slightly. The stock, though, has avoided that loss, rising about 10% over the past year.

The shipping industry has been a disaster for investors in recent years. Across the industry, a glut of vessels and a slow global economy have sent dry-bulk carrier Diana Shipping , tanker company Frontline , and most of their respective peers down sharply as they struggle to survive low shipping rates and huge competition for a dwindling amount of business. The booming energy industry in the U.S. has also reduced the need for imported oil, taking away a major component of shipping demand. DryShips even had to pay a "buyer" recently to take a couple of vessels in construction off its hands.

But for shipping investors seeking a profitable alternative to vessel owners, TAL has tapped into a lucrative niche in the shipping industry: intermodal containers. The company leases containers worldwide, helping shippers avoiding the capital expense of buying their own containers.

That business produced some strong results in TAL's most recent quarter, as the company reported a 12% year-over-year increase in leasing revenues while making substantial investments in new container purchases. TAL also boosted its dividend by 3%, which was the fifth straight quarterly increase.

Yet the stock took a hit recently when TAL reported that several of its major shareholders will sell more than 4 million shares in a secondary offering. With the three selling shareholders completely eliminating their stake in the company, investors have to wonder if they've lost confidence in TAL or whether the sale just represents a normal exit by private equity investors.

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