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A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases 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 passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on companies in the semiconductor industry.

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 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. To access a complete analysis of this list's recent performance, click here.

Do you think these companies have strong profitability? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Maxim Integrated Products Inc. (NASDAQ:MXIM): Semiconductor Industry. Market cap of $6.49B. MRQ Net Profit Margin increased to 20.05% from 10.33% one year ago, Sales/Assets increased to 0.18 from 0.16, while Assets/Equity decreased to 1.41 from 1.48. Might be undervalued at current levels, with a PEG ratio at 0.79, and P/FCF ratio at 14.85. The stock has gained 41% over the last year.

2. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $5.76B. MRQ Net Profit Margin increased to 27.46% from 20.21% one year ago, Sales/Assets increased to 0.19 from 0.14, while Assets/Equity decreased to 1.63 from 1.74. Might be undervalued at current levels, with a PEG ratio at 0.78, and P/FCF ratio at 9.52. The stock has performed poorly over the last month, losing 16.63%.

3. Atmel Corporation (NASDAQ:ATML): Semiconductor Industry. Market cap of $4.05B. MRQ Net Profit Margin increased to 18.99% from -9.26% one year ago, Sales/Assets increased to 0.2835 from 0.2833, while Assets/Equity decreased to 1.50 from 2.17. The stock is currently stuck in a downtrend, trading 14.91% below its SMA20, 27.84% below its SMA50, and 33.06% below its SMA200. The stock has performed poorly over the last month, losing 28.75%.

4. Skyworks Solutions Inc. (NASDAQ:SWKS): Semiconductor Industry. Market cap of $3.63B. MRQ Net Profit Margin increased to 14.48% from 12.62% one year ago, Sales/Assets increased to 0.20 from 0.19, while Assets/Equity decreased to 1.18 from 1.19. The stock is currently stuck in a downtrend, trading 10.39% below its SMA20, 14.86% below its SMA50, and 29.85% below its SMA200. The stock has performed poorly over the last month, losing 25.44%.

5. OmniVision Technologies Inc. (NASDAQ:OVTI): Semiconductor Industry. Market cap of $1.48B. MRQ Net Profit Margin increased to 13.15% from 2.26% one year ago, Sales/Assets increased to 0.25 from 0.20, while Assets/Equity decreased to 1.38 from 1.49. The stock has performed poorly over the last month, losing 19.49%.

6. LDK Solar Co., Ltd. (NYSE:LDK): Semiconductor Industry. Market cap of $892.69M. MRQ Net Profit Margin increased to 17.67% from 2.07% one year ago, Sales/Assets increased to 0.12 from 0.08, while Assets/Equity decreased to 4.81 from 5.23. This is a risky stock that is significantly more volatile than the overall market (beta = 2.51). The stock is a short squeeze candidate, with a short float at 21.81% (equivalent to 5.32 days of average volume). It's been a rough couple of days for the stock, losing 9.28% over the last week.

7. OSI Systems, Inc. (NASDAQ:OSIS): Semiconductor Equipment & Materials Industry. Market cap of $693.42M. MRQ Net Profit Margin increased to 5.01% from 4.20% one year ago, Sales/Assets increased to 0.32 from 0.29, while Assets/Equity decreased to 1.54 from 1.62. The stock has had a couple of great days, gaining 7.06% over the last week. The stock has performed poorly over the last month, losing 12.69%.

8. IXYS Corp. (NASDAQ:IXYS): Semiconductor Industry. Market cap of $354.31M. MRQ Net Profit Margin increased to 9.81% from 7.69% one year ago, Sales/Assets increased to 0.3013 from 0.2977, while Assets/Equity decreased to 1.40 from 1.55. The stock is currently stuck in a downtrend, trading 11.1% below its SMA20, 17.69% below its SMA50, and 12.23% below its SMA200. The stock has performed poorly over the last month, losing 17.43%.

9. Daqo New Energy Corp. (NYSE:DQ): Semiconductor Equipment & Materials Industry. Market cap of $190.46M. MRQ Net Profit Margin increased to 40.08% from 13.95% one year ago, Sales/Assets increased to 0.13 from 0.09, while Assets/Equity decreased to 2.27 from 4.54. The stock is currently stuck in a downtrend, trading 12.26% below its SMA20, 20.16% below its SMA50, and 49.16% below its SMA200. The stock has performed poorly over the last month, losing 11.44%.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 9 Semiconductor Companies With Strong Sources Of Profitability