DuPont Analysis: Five Financials With Increasing Use Of Leverage

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 |  Includes: AON, AXP, ESS, NDAQ, SLM
by: Kapitall

The following list might be an interesting starting point for short ideas. We performed a DuPont analysis on about 130 financial stocks, breaking the Return on Equity (ROE) equation into three parts:

ROE = (Net Profit/Equity) = = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) = (Profit margin)*(Asset turnover)*(Equity multiplier)

All of the stocks mentioned below have seen rising ROE values during the recent quarter. But we wanted to analyze the sources of these returns, and narrowed down the original universe to only focus on companies with the following characteristics:

  • Worsening asset use efficiency, i.e. declining Sales/Assets ratio
  • Increasing leverage, i.e. rising Asset/Equity ratio

Of course, it's common for financial firms to use leverage to boost their ROE, but these companies stood out because of their increasing ROE ratios.

Is this an excessive use of leverage? To provide perspective on investor sentiment, we'll also include data on short positions affecting these stocks. Full details below.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


The list has been sorted by the change in the ROE ratio. Note: All ratios compare the most recent quarter's values against last year's corresponding quarter.

1. SLM Corporation (NYSE:SLM): Credit Services Industry. Market cap of $7.69B. Return on Equity increased from 5.86% to 8.93% during the most recent quarter. When analyzing the sources of return, Net Profit Margin changed from 17.36% to 22.74%. Sales/Assets decreased from 0.0105 to 0.0096, while Assets/Equity increased from 32.20 to 40.97 (comparing the 3 months ending 2009-12-31 vs. the 3 months ending 2010-12-31). Short float at 2.73%, which implies a short ratio of 3.32 days. The stock has gained 36.83% over the last year.

2. Nasdaq OMX Group Inc. (NASDAQ:NDAQ): Diversified Investments Industry. Market cap of $5.17B. Return on Equity increased from 0.87% to 2.90% during the most recent quarter. When analyzing the sources of return, Net Profit Margin changed from 5.27% to 17.50%. Sales/Assets decreased from 0.0761 to 0.0483, while Assets/Equity increased from 2.17 to 3.44 (comparing the 3 months ending 2009-12-31 vs. the 3 months ending 2010-12-31). Short float at 4.69%, which implies a short ratio of 3.53 days. The stock has gained 42.37% over the last year.

3. American Express Company (NYSE:AXP): Credit Services Industry. Market cap of $52.4B. Return on Equity increased from 4.97% to 6.64% during the most recent quarter. When analyzing the sources of return, Net Profit Margin changed from 10.15% to 13.40%. Sales/Assets decreased from 0.0563 to 0.0539, while Assets/Equity increased from 8.69 to 9.19 (comparing the 3 months ending 2009-12-31 vs. the 3 months ending 2010-12-31). Short float at 1.12%, which implies a short ratio of 1.5 days. The stock has gained 18.06% over the last year.

4. Essex Property Trust Inc. (NYSE:ESS): REIT. Market cap of $3.67B. Return on Equity increased from -0.12% to 0.66% during the most recent quarter. When analyzing the sources of return, Net Profit Margin changed from -1.22% to 6.60%. Sales/Assets decreased from 0.0311 to 0.0299, while Assets/Equity increased from 3.17 to 3.36 (comparing the 3 months ending 2009-09-30 vs. the 3 months ending 2010-09-30). Short float at 8.86%, which implies a short ratio of 10.15 days. The stock has gained 56.82% over the last year.

5. Aon Corporation (NYSE:AON): Insurance Brokers Industry. Market cap of $12.5B. Return on Equity increased from 2.00% to 2.50% during the most recent quarter. When analyzing the sources of return, Net Profit Margin changed from 6.69% to 8.05%. Sales/Assets decreased from 0.0829 to 0.0771, while Assets/Equity increased from 3.61 to 4.03 (comparing the 3 months ending 2009-09-30 vs. the 3 months ending 2010-09-30). Short float at 1.67%, which implies a short ratio of 1.87 days. The stock has gained 20.68% over the last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.