Margins matter. The more Healthways (Nasdaq: HWAY) 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. Healthy margins often separate pretenders from the best stocks in the market. 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 Healthways' competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Healthways

27.9%

10.7%

5.3%

 LabCorp (NYSE: LH)

42.1%

20.4%

11.7%

 Quest Diagnostics (NYSE: DGX)

42.0%

18.3%

9.8%

 Unitedhealth Group (NYSE: UNH)

25.9%

8.0%

4.8%

 Aetna (NYSE: AET)

26.2%

7.3%

4.5%

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

Unfortunately, that table doesn't tell us much about where Healthways 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 Healthways over the past few years:



Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

Note that Healthways reported numbers for two different fiscal years -- one ending Aug. 31, the other ending Dec. 31 -- for both 2007 and 2008. Also, 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:

  • Since 2007, gross margin peaked at 32.1% and averaged 30.6%. Operating margin peaked at 15.4% and averaged 13.9%. Net margin peaked at 7.4% and averaged 5.7%.
  • TTM gross margin is 27.9%, 270 basis points worse than the average since 2007. TTM operating margin is 10.7%, 320 basis points worse than the average. TTM net margin is 5.3%, 40 basis points worse than the average since 2007.

With recent TTM operating margins below historical averages, Healthways has some work to do.

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 best returns in the stock market.  Got an opinion on the margins at Healthways? Let us know in the comments below.

Quest Diagnostics and UnitedHealth Group are Motley Fool Inside Value picks. Healthways, LabCorp, and UnitedHealth Group are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group, of which The Fool owns shares. Try any of our Foolish newsletter services 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.

Seth Jayson had no position in any company mentioned here at the time of publication. 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. The Motley Fool has a disclosure policy.