Investors prefer to put their money in businesses that reap 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 reflects a company’s efficiency in converting sales into actual profits.
Modine Manufacturing ( MOD Quick Quote MOD - Free Report) , LSI Industries ( LYTS Quick Quote LYTS - Free Report) , M/I Homes ( MHO Quick Quote MHO - Free Report) and Gibraltar Industries ( ROCK Quick Quote ROCK - 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 not only attracts investors but also draws well-skilled employees who eventually enhance a business's 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 32 stocks that qualified the screening:
Modine Manufacturing operates primarily in a single industry consisting of the manufacture and sale of heat transfer equipment. These include heat exchangers for cooling all types of engines, transmissions, auxiliary hydraulic equipment, air conditioning components used in cars, trucks, farm and construction machinery and equipment, and heating and cooling equipment for residential and commercial building heating, ventilating, air conditioning and refrigeration equipment. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $2.88 per share for Modine Manufacturing’s fiscal 2024 earnings has moved 24.1% north in the past 60 days. MOD surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 44.7%.
LSI Industries is an Image Solutions company that combines integrated design, manufacturing, & technology to supply its own high-quality lighting fixtures and graphics elements for applications in the retail, specialty niche, & commercial markets. At present, the stock flaunts a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for LSI Industries’ current-year earnings has moved up by 19.1% to $1.12 per share in the past 30 days. LYTS surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 61.2%.
M/I Homes is one of the nation's leading builders of single-family homes. The company designs, markets, constructs and sells single-family homes and attached townhomes. Its clients include first-time, move-up, empty-nester and luxury buyers. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for M/I Homes’ current-year earnings has moved up to $16.88 per share from $12.58 60 days ago. MHO surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 40.4%.
Gibraltar Industries manufactures and distributes products to the industrial and buildings market. The products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions. At present, the stock flaunts a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for Gibraltar Industries’ current-year earnings has moved up by a penny to $3.97 per share in the past 30 days. ROCK surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 11.2%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
. 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/