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Next week will see the kick-off to Q3 earnings season – do you have a watchlist prepared?

For an interesting starting point, look to DuPont analysis of return on equity (ROE) profitability.

There is always more to a company’s story than their bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways – some more preferred than others. This is why it is always a good idea to study the sources of profits for a company.

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 stocks reporting their Q3 earnings next week.

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.‬


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 change in ROE.

1. Valmont Industries, Inc. (VMI):
Produces and sells fabricated metal products, pole and tower structures, and mechanized irrigation systems in the United States and internationally. Market cap of $1.96B. Earnings to be released on 10/13. MRQ Net Profit Margin increased to 6.85% from 3.55% year-over-year, Sales/Assets increased to 0.30 from 0.24, while Assets/Equity decreased to 2.18 from 2.59. It's been a rough couple of days for the stock, losing 10.14% over the last week.

2. Alcoa, Inc. (AA):
Engages in the production and management of aluminum, fabricated aluminum, and alumina. Market cap of $9.47B. Earnings to be released on 10/11. MRQ Net Profit Margin increased to 4.89% from 2.62% year-over-year, Sales/Assets increased to 0.16 from 0.14, while Assets/Equity decreased to 2.65 from 2.96. This is a risky stock that is significantly more volatile than the overall market (beta = 2.13). It's been a rough couple of days for the stock, losing 14.83% over the last week.

3. Genuine Parts Company (GPC):
Distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. Market cap of $7.73B. Earnings to be released on 10/10. MRQ Net Profit Margin increased to 4.77% from 4.37% year-over-year, Sales/Assets increased to 0.56 from 0.55, while Assets/Equity decreased to 1.9565 from 1.9589. The stock has performed poorly over the last month, losing 10.21%.

4. Knoll Inc. (KNL):
Engages in the design, manufacture, and sale of workplace furnishings, textiles, and fine leathers for the workplace and home. Market cap of $617.83M. Earnings to be released on 10/10. MRQ Net Profit Margin increased to 5.43% from 4.51% year-over-year, Sales/Assets increased to 0.35 from 0.30, while Assets/Equity decreased to 4.35 from 6.70. The stock is currently stuck in a downtrend, trading 7.13% below its SMA20, 14.1% below its SMA50, and 27.39% below its SMA200. It's been a rough couple of days for the stock, losing 9.08% over the last week.

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

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

Source: 4 Companies Reporting Earnings Next Week With Strong Sources Of Profitability