Profitability is a powerful word for investors, but it also holds a lot of ambiguity. Profitable compared to what? Profitability based on what?
To address this issue we applied two different profitability measures on a universe of stocks with market caps over $300 million.
First, we compared companies' profit margins against their industry averages based on the following profit margins:
- TTM Gross margin: This metric tells us the percentage of a company's revenue that's left after paying the costs for production of inventory.
- TTM Operating margin: This is the percentage of sales remaining after all operating expenses are paid. Operating expenses include: supplies, repairs, research and development, and depreciation.
- TTM Pre-tax margin: A company's earnings before taxes. This incorporates all of the expenses associated with business excluding taxes.
The DuPont equation
Next, we considered that it's important for investors to understand the sources for that profitable edge -- is it sustainable?
One of analysts' favorite profitability tools is DuPont analysis -- it's a way to look at changes in return on equity (ROE) profitability (i.e., net income/equity) by attributing those changes to certain sources.
Some of the sources are more sustainable than others, thereby giving an analysis of strength in increasing profitability.
DuPont analysis breaks up a company's ROE into three components: net margin, asset turnover, and leverage. Companies with increasing net margin, increasing asset turnover, and decreasing leverage are viewed favorably.
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
Business section: Investing ideas
The following is a list of companies that are more profitable than their competitors and have encouraging DuPont breakdowns.
Do you think these names are appropriately valued? (Click here to access free, interactive tools to analyze these ideas.)
2. CEVA: With its subsidiaries engage in designing and licensing silicon intellectual property (SIP) for the handsets, portable multimedia, and consumer electronics markets. TTM gross margin at 94.32% vs. industry average at 59.98%. TTM operating margin at 30.36% vs. industry average at 24.37%. TTM pre-tax margin at 34.81% vs. industry average at 23.4%. MRQ net profit margin at 33.2% vs. 28.% y/y. MRQ sales/assets at 0.07 vs. 0.062 y/y. MRQ assets/equity at 1.089 vs. 1.111 y/y.
3. Wright Express: Provides payment processing and information management products and services to the commercial and government vehicle fleet industry in the United States, Canada, New Zealand, Australia, and Europe. TTM gross margin at 50.4% vs. industry average at 46.48%. TTM operating margin at 41.85% vs. industry average at 30.25%. TTM pre-tax margin at 35.38% vs. industry average at 26.6%. MRQ net profit margin at 31.67% vs. 20.52% y/y. MRQ sales/assets at 0.061 vs. 0.048 y/y. MRQ assets/equity at 3.747 vs. 3.977 y/y.
4. FleetCor Technologies: Provides specialized payment products and services to commercial fleets, oil companies, and petroleum marketers in North America, Europe, Africa, and Asia. TTM gross margin at 51.29% vs. industry average at 46.48%. TTM operating margin at 45.2% vs. industry average at 30.25%. TTM pre-tax margin at 37.09% vs. industry average at 26.6%. MRQ net profit margin at 30.18% vs. 29.91% y/y. MRQ sales/assets at 0.077 vs. 0.074 y/y. MRQ assets/equity at 2.283 vs. 2.629 y/y.
5. DuPont Fabros Technology: Engages in the ownership, acquisition, development, operation, management, and lease of large-scale data center facilities in the United States. TTM gross margin at 69.74% vs. industry average at 39.7%. TTM operating margin at 38.25% vs. industry average at 37.26%. TTM pre-tax margin at 27.54% vs. industry average at 15.16%. MRQ net profit margin at 26.46% vs. 17.93% y/y. MRQ sales/assets at 0.03 vs. 0.025 y/y. MRQ assets/equity at 1.956 vs. 2.955 y/y.
6. KLA-Tencor: Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. TTM gross margin at 62.17% vs. industry average at 59.98%. TTM operating margin at 36.26% vs. industry average at 24.37%. TTM pre-tax margin at 34.48% vs. industry average at 23.4%. MRQ net profit margin at 24.11% vs. 22.6% y/y. MRQ sales/assets at 0.174 vs. 0.17 y/y. MRQ assets/equity at 1.556 vs. 1.71 y/y.
7. CARBO Ceramics
8. American Electric Power
9. Weight Watchers International
10. Las Vegas Sands
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Profitability data sourced from Fidelity and Google Finance.
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