When we read about companies reporting quarterly earnings, we often gloss over matters. We may check to see whether the company reported rising revenue and earnings per share (EPS), and we may be pleased to read about "record" numbers. But don't make too much out of too little information.
The more you dig into a company's numbers, the more you'll understand about its performance and its promise. Take IBM (NYSE: IBM), for example. It recently reported strong results (especially given our struggling economy), with earnings per share up 18% year over year. Revenue was down a significant 13%, though. That might seem like a mixed bag.
But looking at more details reveals some other positive news. Look at profit margins. The company noted:
- Net margin of 13.3%, up 3 percentage points.
- Pre-tax income margin of 18.3%, up 4.1 points.
- Gross profit margin of 45.5%, up 2.3 points. This has risen year over year in 19 of last 20 quarters.
What it means, and what to do
These numbers reflect a company with a lot of pricing power, able to command sizable premiums on its offerings. Better still, the numbers have been growing, and significantly, by several percentage points each. That's impressive. It shows that although the company may have taken in less in revenue, it's keeping much more of every dollar it takes in.
And best of all, look at that 19-out-of-20-quarters streak. That shows commitment and able execution. That kind of streak isn't likely to just happen.
If you like screening for promising stocks, you can screen for those that have increased their margins. Here, for example, are some that have increased their gross margin over the past year:
|
Company
|
CAPS Stars
(out of five)
|
Gross Margin, TTM
|
Gross Margin, TTM as of One Year Ago
|
|
Mosaic (NYSE: MOS)
|
****
|
31.6%
|
29.0%
|
|
Potash (NYSE: POT)
|
****
|
54.0%
|
43.2%
|
|
Chesapeake Energy (NYSE: CHK)
|
*****
|
62.0%
|
56.7%
|
|
NRG Energy (NYSE: NRG)
|
*****
|
50.8%
|
43.2%
|
Data: Motley Fool CAPS; Capital IQ, a division of Standard and Poor's.
So don't just look at earnings headlines. Digging deeper into financial results can give you a completely different picture of a company.
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