Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends an insight into how well a company is run and the headwinds weighing on it.
Target Hospitality Corporation ( TH Quick Quote TH - Free Report) , SP Plus Corporation ( SP Quick Quote SP - Free Report) , Universal Logistics Holdings, Inc. ( ULH Quick Quote ULH - Free Report) and Franklin Covey Co. ( FC Quick Quote FC - Free Report) boast solid net profit margins. 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, the net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.
Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric attracts investors and draws well-skilled employees, who eventually enhance business value.
Moreover, a higher net profit margin compared with its peers provides the company with 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 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 important for technology companies.
In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.
Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing 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 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 stock. Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments. You can see . the complete list of today’s Zacks #1 Rank stocks here Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential. VGM Score of A or B:
Here we discuss our four picks from the 55 stocks that qualified the screen:
Target Hospitality is the holding company for Target Lodging, Signor Lodging and their respective subsidiaries. The company, through Target Lodging and Signor Lodging, builds, owns and operates customized housing communities for hospitality solutions including culinary, catering, concierge, laundry and security services as well as recreational facilities. Target Hospitality sports a Zacks Rank of 1, at present, and has a VGM Score of A.
The Zacks Consensus Estimate for Target Hospitality’s 2022 earnings has been revised upward to $1.37 per share from $1.18 in the past seven days. TH surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 135.3%.
SP Plus provides professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry. The company sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for SP Plus’ 2022 earnings has been revised upward to $2.83 per share from $2.69 in the past 30 days. SP surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average beat being 19.5%.
Universal Logistics is a provider of customized transportation and logistics solutions. It offers services across its entire supply chain, including truckload, brokerage, intermodal, dedicated and value-added services. Universal Logistics currently sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate of $5.80 for Universal Logistics’ 2022 earnings per share has moved 27.5% north in the past 30 days. ULH surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 73.7%.
Franklin Covey is an international learning and performance solutions company dedicated to increasing the effectiveness of individuals and organizations. Franklin Covey sports a Zacks Rank of 1, at present, and has a VGM Score of B.
The Zacks Consensus Estimate for FC’s fiscal 2022 earnings has been revised upward by 34 cents to $1.21 per share in the past 60 days. Franklin Covey surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 237%.
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. Click here to sign up for a free trial to the Research Wizard today 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/