Margins matter. The more Alcon (NYSE: ACL) 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 Alcon's competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Alcon

76%

36.1%

31.9%

 Merck (NYSE: MRK)

69.8%

23%

28.2%

 Johnson & Johnson (NYSE: JNJ)

70%

26.9%

21.6%

 Eli Lilly (NYSE: LLY)

79.6%

28.6%

19.6%

 ISTA Pharmaceuticals (Nasdaq: ISTA)

75.8%

6.5%

19.4%

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, that chart doesn't tell us much about where Alcon 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 latest fiscal year, and latest 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 Alcon 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, the gross margin peaked at 76.6% and averaged 75.6%. The operating margin peaked at 35.2% and averaged 33.9%. The net margin peaked at 32.5% and averaged 28.1%.
  • The fiscal year 2009 gross margin was 75.2%, 40 basis points worse than the five-year average. The fiscal year 2009 operating margin was 34.8%, 90 basis points better than the five-year average. The fiscal year 2009 net margin was 30.9%, 280 basis points better than the five-year average.
  • The TTM gross margin is 76%, 40 basis points better than the five-year average. The TTM operating margin is 36.1%, 220 basis points better than the five-year average. The TTM net margin is 31.9%, 380 basis points better than the five-year average.
  • The LFQ gross margin is 77.4%, 210 basis points better than the prior-year quarter. The LFQ operating margin is 39.8%, 210 basis points better than the prior-year quarter. The LFQ net margin is 35.5%, 80 basis points better than the prior-year quarter.

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

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. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at Alcon in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Seth Jayson owned shares of the following at the time of publication: 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. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended buying calls on Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.