Seeking Alpha
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message| ()  

One important consideration for tech stocks is how easily the companies can pay their ongoing capital expenditures. Operating cash flow is a likely source for this payment, so the ratio of operating cash flow to capital expenditures can give an idea of whether the firm’s fixed asset expenses are reasonably covered, with cash to spare.

We ran a screen with this idea in mind, however we also wanted to take into account profitability.

One way to analyze the profitability of a company is to use DuPont analysis of return on equity (ROE). ROE can be broken up into three components such that changes in ROE can be attributed to those components.

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics:

Increasing ROE along with

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies that pass all requirements are thus experiencing an increase in profits due to operations and not due to increased use of leverage.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We ran a screen of the tech sector for stocks that have sufficient coverage of capital expenditures, with trailing-twelve-month operating cash flow/capital expenditures larger than 5. We then ran a DuPont analysis on these names to find those with encouraging sources of increased profitability.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. Click here to access a complete analysis of this list's recent performance.

click on image to enlarge

Do you think these companies are performing well? Use this list as a starting-off point for your own analysis.

List sorted by most recent quarter net profit margin:

  1. JDA Software Group Inc. (JDAS): Business Software & Services Industry. Market cap of $1.30B. TTM operating CF/capital expenditures at 5.78. MRQ net profit margin increased to 27.83% from -3.24% one year ago, Sales/Assets improved to 0.14 from 0.12, while Assets/Equity has decreased to 1.78 from 1.91. The stock is a short squeeze candidate, with a short float at 5.17% (equivalent to 7.7 days of average volume). The stock has gained 29.24% over the last year.
  2. ASML Holding NV (ASML): Semiconductor Equipment & Materials Industry. Market cap of $15.35B. TTM operating CF/capital expenditures at 9.99. MRQ net profit margin increased to 27.20% from 14.46% one year ago, Sales/Assets improved to 0.21 from 0.17, while Assets/Equity has decreased to 2.28 from 2.43. The stock has gained 17.61% over the last year.
  3. KLA-Tencor Corporation (KLAC): Semiconductor Equipment & Materials Industry. Market cap of $7.12B. TTM operating CF/capital expenditures at 14.57. MRQ net profit margin increased to 25.15% from 11.92% one year ago, Sales/Assets improved to 0.19 from 0.13, while Assets/Equity has decreased to 1.66 from 1.71. The stock has had a good month, gaining 11.05%.
  4. QLogic Corp. (QLGC): Semiconductor Industry. Market cap of $1.70B. TTM operating CF/capital expenditures at 8.19. MRQ net profit margin increased to 21.88% from -3.31% one year ago, Sales/Assets improved to 0.20 from 0.19, while Assets/Equity has decreased to 1.26 from 1.29. The stock has lost 12.69% over the last year.
  5. Integrated Device Technology, Inc. (IDTI): Semiconductor Industry. Market cap of $1.08B. TTM operating CF/capital expenditures at 5.95. MRQ net profit margin increased to 21.31% from 0.70% one year ago, Sales/Assets improved to 0.20 from 0.18, while Assets/Equity has decreased to 1.21 from 1.25. The stock has gained 42.55% over the last year.
  6. Garmin Ltd. (GRMN): Scientific & Technical Instruments Industry. Market cap of $6.21B. TTM operating CF/capital expenditures at 21.06. MRQ net profit margin increased to 18.80% from 8.66% one year ago, Sales/Assets improved to 0.13 from 0.12, while Assets/Equity has decreased to 1.23 from 1.39. The stock is a short squeeze candidate, with a short float at 18.87% (equivalent to 14.35 days of average volume). The stock has gained 11.89% over the last year.
  7. Open Text Corp. (OTEX): Application Software Industry. Market cap of $3.91B. TTM operating CF/capital expenditures at 7.73. MRQ net profit margin increased to 13.63% from 6.16% one year ago, Sales/Assets improved to 0.14 from 0.12, while Assets/Equity has decreased to 1.91 from 2.00. The stock is a short squeeze candidate, with a short float at 10.35% (equivalent to 18.22 days of average volume). The stock has had a good month, gaining 14.2%.
  8. FEI Co. (FEIC): Scientific & Technical Instruments Industry. Market cap of $1.42B. TTM operating CF/capital expenditures at 10.15. MRQ net profit margin increased to 11.33% from 2.75% one year ago, Sales/Assets improved to 0.19 from 0.16, while Assets/Equity has decreased to 1.53 from 1.67. The stock has gained 94.54% over the last year.
  9. Descartes Systems Group Inc. (DSGX): Business Software & Services Industry. Market cap of $423.45M. TTM operating CF/capital expenditures at 9.03. MRQ net profit margin increased to 7.94% from 0.89% one year ago, Sales/Assets improved to 0.11 from 0.09, while Assets/Equity has decreased to 1.17 from 1.19. The stock has gained 17.41% over the last year.
  10. Cohu, Inc. (COHU): Semiconductor Equipment & Materials Industry. Market cap of $323.82M. TTM operating CF/capital expenditures at 6.63. MRQ net profit margin increased to 7.32% from 1.40% one year ago, Sales/Assets improved to 0.24 from 0.20, while Assets/Equity has decreased to 1.29 from 1.31. The stock has had a good month, gaining 11.14%.
  11. ACI Worldwide, Inc. (ACIW): Technical & System Software Industry. Market cap of $1.19B. TTM operating CF/capital expenditures at 5.27. MRQ net profit margin increased to 1.55% from -2.38% one year ago, Sales/Assets improved to 0.17 from 0.16, while Assets/Equity has decreased to 2.32 from 2.43. The stock has had a good month, gaining 22.02%.
  12. Nuance Communications, Inc. (NUAN): Application Software Industry. Market cap of $6.44B. TTM operating CF/capital expenditures at 7.73. MRQ net profit margin increased to 0.55% from -5.64% one year ago, Sales/Assets improved to 0.08 from 0.08, while Assets/Equity has decreased to 1.63 from 1.68. The stock has gained 31.22% over the last year.

*Operating cash flow/capital expenditures data sourced from Screener.co, accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 12 Tech Stocks With Strong Sources of Profitability and Good Cash Coverage