Margins matter. The more WuXi PharmaTech (NYSE: WX) 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 WuXi PharmaTech's competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 WuXi PharmaTech 40.1% 19.3% 19.6%
 ICON  41.5% 12.6% 11.2%
 Covance (NYSE: CVD) 29.4% 10.8% 8.1%
 Pharmaceutical Product Development (Nasdaq: PPDI) 48.0% 10.6% 6.7%
 Parexel International (Nasdaq: PRXL) 31.9% 7.8% 3.1%

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

Unfortunately, that table doesn't tell us much about where WuXi PharmaTech 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 WuXi PharmaTech 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.

(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 54.1% and averaged 45.6%. Operating margin peaked at 25.9% and averaged 19.5%. Net margin peaked at 25.1% and averaged 10.0%.
  • TTM gross margin is 40.1%, 550 basis points worse than the five-year average. TTM operating margin is 19.3%, 20 basis points worse than the five-year average. TTM net margin is 19.6%, 960 basis points better than the five-year average.

The picture is fairly unclear for WuXi PharmaTech. Recent TTM gross and operating margins are below historical averages, but net margins are higher. The average for net margin was greatly affected by one bad year in 2008, though, so it seems WuXi still 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 WuXi PharmaTech? Let us know in the comments below.

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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. Pharmaceutical Product Development is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.