Margins matter. The more Elan (NYSE: ELN) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Elan's competitive position could be.

Here's the current margin snapshot for Elan and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Elan

50.3%

5.7%

(18.9%)

 Bristol-Myers Squibb (NYSE: BMY)

73.1%

28.5%

55.0%

 Impax Laboratories (Nasdaq: IPXL)

63.0%

47.1%

28.9%

 Valeant Pharmaceuticals International (NYSE: VRX)

74.7%

33.0%

28.3%

 Johnson & Johnson (NYSE: JNJ)

70.0%

26.9%

21.6%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Elan has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Elan over the past few years.


(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 62.5% and averaged 55.7%. Operating margin peaked at (1.0%) and averaged (27.7%). Net margin peaked at (7.1%) and averaged (40.4%).
  • Fiscal year 2009 gross margin was 49.6%, 610 basis points worse than the five-year average. Fiscal year 2009 operating margin was (1.0%), 2,670 basis points better than the five-year average. Fiscal year 2009 net margin was (15.8%), 2,460 basis points better than the five-year average.
  • TTM gross margin is 50.3%, 540 basis points worse than the five-year average. TTM operating margin is 5.7%, 3,340 basis points better than the five-year average. TTM net margin is (18.9%), 2,150 basis points better than the five-year average.
  • LFQ gross margin is 47.3%, 310 basis points worse than the prior-year quarter. LFQ operating margin is (0.7%), 230 basis points better than the prior-year quarter. LFQ net margin is (79.2%), 5,490 basis points worse than the prior-year quarter.

With recent 12-month-period operating margins exceeding historical averages, Elan looks like it's doing better.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the home run stock you're too afraid to buy.

Seth Jayson owned shares of the following at the time of publication: Elan, Johnson & Johnson. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Elan is a Rule Breakers pick. Johnson & Johnson is an Income Investor selection. Motley Fool Options has recommended buying calls on Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.