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4 Top Stocks with Marvelous Net Profit Margin

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Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same reveals how well a company is run and the headwinds confronting it.

A higher net margin reflects the company’s efficiency at converting sales into actual profit.

Net Profit Margin = Net profit /Sales * 100.

In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. In fact, net profit margin can turn out to be a potent point of reference to gauge the strength in a company operations and cost-control measures.

Net margin helps investors assess the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.

Moreover, the strength in the metric not only attracts investors but also draws well-skilled employees who eventually add to the value of the business.

Moreover, a higher net profit margin as compared to peers lends a competitive edge.

Pros and Cons

Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

However, net profit margin as an investment criterion has its own share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that crucial for technology companies.

Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a daunting task.

Further, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective for the analysis of a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.

Apart from these, we have added a few other criteria to ensure maximum returns from this strategy.

Screening Parameters

Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.

Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.

Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the prospects of the stock.

Zacks Rank equal to 1: In good markets or bad, stocks with a Zacks Rank #1 (Strong Buy) continue to outperform. You can see the complete list of today’s Zacks #1 Rank stocks here.

VGM Score of ‘A’ or ‘B’: Our research shows that stocks with a VGM Score of 'A' or 'B' when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.

Here are four stocks that qualified the screen:

Hounslow, U.K.-based International Consolidated Airlines Group S.A. (ICAGY - Free Report) is a holding company for British Airways and Iberia. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings has increased almost 15% to $1.77 per share over the last 30 days.

International Consolidated Airlines’ year-to-date return of 18.3% is higher than the Zacks Transportation-Airline industry’s addition of 9.3%.

Covington, LA-based Pool Corporation (POOL - Free Report) is the world's largest wholesale distributor of swimming pool supplies, equipment and related products. The stock has a VGM Style Score of ‘B’. Pool delivered an average positive earnings surprise of 189.93% in the trailing four quarters.

Meanwhile, the Zacks Consensus Estimate for 2017 earnings increased 4.7% $3.98 per share over the last 30 days. Further, the stock outperformed the Zacks Leisure and Recreation Products industry in the last one year. While Pool added 44.2%, the industry gained 10.4% over the said period.

Los Angeles, CA-based j2 Global Inc. provides cloud-based communications and storage messaging services. The stock has a VGM score of ‘A’. The company delivered an average positive earnings surprise of 2.46% in the trailing four quarters. Moreover, 2017 earnings estimates increased 8.1% to $5.59 per share over the last 30 days.

Notably, j2 Global gained 23.4% in the last six months while the Zacks Internet Software industry lost 2.3%.

Tokyo, Japan-based TDK Corporation (TTDKY - Free Report) is a manufacturer and seller of electronic components. The stock has a VGM score of ‘B’. Meanwhile, the Zacks Consensus Estimate for 2017 increased 12.7% to $11.18 per share over the last 30 days.

TDK’s one-year gain of 36.6% compares favorably with the Zacks Electronics – Miscellaneous Components industry’s return of 35.4%.
 

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance.

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