With a return of nearly 7 percent since the start of the fourth quarter, the Reuters Select Industry Leaders screen has outperformed the other Reuters Select stock screens and the 3 percent gain in the S&P 500 index and the 4 percent advance in the NASDAQ. Among stocks that recently appeared on the Industry Leaders screen, Eagle Materials Inc. (NYSE:EXP) stands out.
The Industry Leaders screen is designed to highlight companies that are leading their respective industries according to such factors as superior revenue and earnings growth, wider profit margins, and lower debt. Recently, 622 companies landed on the Reuters Select stock screens, but only 41 registered on the Industry Leaders screen. [Click here for an Excel sheet comparing these companies.]
Our first step was to filter for companies where management has demonstrated an ability to effectively use available capital. As such, we focused on return on investment [ROI], which is calculated as net income divided by shareholder equity, long-term debt, and all other long-term liabilities. We filtered for the companies that had ROI above the norm for their respective industries over two time periods: the last five years and the trailing 12 months [TTM]. This reduced our list of names to 26.
Of course, we also want companies whose performance has been improving. We filtered for companies whose ROI in the TTM period is superior to the company's own five-year average. This dropped our list to 19 companies.
Some of these companies could have improved as part of an overall upswing in their respective industries. But we want companies that are also widening the magnitude of their advantage. Our next step, then, was to filter for companies where the ratio of ROI relative to the industry norm was greater in the TTM time frame than the five-year average. The list fell to 11 names.
A couple of key factors that help a company buoy its ROI are improved profit margins and faster revenue and earnings growth. As indicated below, Eagle Materials has not only done a good job of improving its profit margins in the TTM span from its own five-year average, but it has widened its profit margins while other companies in the construction raw materials industry have experienced a narrowing of margins.
Eagle's superior profit margins helped it satisfy one of the requirements of the Industry Leaders screen. The screen focuses on net profit margin and requires that a company's TTM reading must be at least 10 percent better than the industry norm. As indicated above, Eagle's reading is more than double the industry's.
We then filtered for companies where the TTM growth for both revenue and earnings per share [EPS] surpassed the industry norms, which left us with only four firms.
Not only has Eagle posted faster revenue and EPS growth in the TTM span, but it has also reported faster growth over the last five years, satisfying the growth requirements of the screen.
In our final filter, we examined valuation metrics. We focused on PEG ratios, which are calculated as the forward price to earnings ratio divided by the consensus estimate for the long-term EPS growth rate. Lower PEG ratios indicate better valuations, so we focused on the company with the lowest PEG reading. This led us to zero in on Eagle Materials.
In order to appear on the Industry Leaders screen, a company must also have relatively lower debt. Specifically, the total debt to equity ratio must be below the industry average. As indicated below, not only does Eagle have a relatively lower total debt to equity reading, but it also has a marginally lower long-term debt to equity ratio. Further, Eagle seems to be in a superior cash position, with higher quick and current ratios.
Disclosure: At the time of publication, the author did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.