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Company profitability is not as straightforward as it often appears to be. Although net income is the popular headline number that analysts follow during earnings season, companies can earn these profits in different ways, with some preferred over others. This is why it is important to also 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 with 5-year projected EPS growth above 20%.

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 stocks have strong profitability? Use this list as a starting-off point for your own analysis.

List sorted by change in ROE.

1. Resources Connection Inc. (NASDAQ:RECN): Provides professional services in provides finance, accounting, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, actuarial, and legal and regulatory services in support of client-led projects and initiatives. Market cap of $473.84M. Analyst projected EPS growth over the next 5 years at 23.94%. MRQ Net Profit Margin increased to 1.88% from 0.99% year-over-year, Sales/Assets increased to 0.30 from 0.26, while Assets/Equity decreased to 1.26 from 1.33. The stock is a short squeeze candidate, with a short float at 6.25% (equivalent to 6.21 days of average volume). The stock has had a good month, gaining 16.25%.

2. CONSOL Energy Inc. (NYSE:CNX): Engages in the production of multi-fuel energy and provision of energy services primarily to the electric power generation industry in the United States. Market cap of $9.28B. Analyst projected EPS growth over the next 5 years at 42.0%. MRQ Net Profit Margin increased to 11.0% from 5.59% year-over-year, Sales/Assets increased to 0.13 from 0.12, while Assets/Equity decreased to 3.55 from 3.77. The stock has had a good month, gaining 29.05%.

3. Denbury Resources Inc. (NYSE:DNR): Engages in the acquisition, exploitation, drilling, and extraction of oil and natural gas properties in the Gulf Coast region located in Mississippi, Texas, Louisiana, and Alabama. Market cap of $6.13B. Analyst projected EPS growth over the next 5 years at 21.46%. MRQ Net Profit Margin increased to 43.11% from 27.23% year-over-year, Sales/Assets increased to 0.06 from 0.05, while Assets/Equity decreased to 2.01 from 2.26. The stock has recently rebounded, and is currently trading 6.92% above its SMA20 and 8.71% above its SMA50. However, the stock still trades 20.44% below its SMA200. The stock has had a good month, gaining 40.24%.

4. eResearchTechnology, Inc. (NASDAQ:ERT): Provides technological services and medical devices in North America and the United Kingdom. Market cap of $239.75M. Analyst projected EPS growth over the next 5 years at 21.50%. MRQ Net Profit Margin increased to 4.15% from 2.85% year-over-year, Sales/Assets increased to 0.18 from 0.14, while Assets/Equity decreased to 1.37 from 1.45. The stock has had a good month, gaining 20.25%.

5. Kansas City Southern (NYSE:KSU): Engages primarily in the freight rail transportation business. Market cap of $6.83B. Analyst projected EPS growth over the next 5 years at 25.71%. MRQ Net Profit Margin increased to 18.33% from 12.07% year-over-year, Sales/Assets increased to 0.09 from 0.08, while Assets/Equity decreased to 2.27 from 2.36. Exhibiting strong upside momentum--currently trading 6.46% above its SMA20, 15.21% above its SMA50, and 14.37% above its SMA200. The stock has had a good month, gaining 28.06%.

6. Franklin Electric Co. Inc. (NASDAQ:FELE): Engages in the design, manufacture, and distribution of groundwater and fuel pumping systems. Market cap of $1.01B. Analyst projected EPS growth over the next 5 years at 40.0%. MRQ Net Profit Margin increased to 9.66% from 5.84% year-over-year, Sales/Assets increased to 0.2595 from 0.2590, while Assets/Equity decreased to 1.87 from 1.90. The stock has had a good month, gaining 23.82%.

7. Sapient Corp. (NASDAQ:SAPE): Offers integrated marketing and creative services. Market cap of $1.66B. Analyst projected EPS growth over the next 5 years at 24.70%. MRQ Net Profit Margin increased to 5.73% from 3.61% year-over-year, Sales/Assets increased to 0.39 from 0.37, while Assets/Equity decreased to 1.37 from 1.41. The stock is a short squeeze candidate, with a short float at 6.64% (equivalent to 5.11 days of average volume). The stock has had a good month, gaining 27.49%.

8. Abercrombie & Fitch Co. (NYSE:ANF): Operates as a specialty retailer of casual apparel for men, women, and kids. Market cap of $6.45B. Analyst projected EPS growth over the next 5 years at 20.62%. MRQ Net Profit Margin increased to 3.49% from 2.61% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 1.55 from 1.57. Exhibiting strong upside momentum--currently trading 6.54% above its SMA20, 12.77% above its SMA50, and 14.6% above its SMA200. The stock has had a good month, gaining 24.46%.

9. Mobile Mini, Inc. (NASDAQ:MINI): Provides portable storage solutions in North America, the United Kingdom, and the Netherlands. Market cap of $768.54M. Analyst projected EPS growth over the next 5 years at 27.0%. MRQ Net Profit Margin increased to 8.77% from 5.84% year-over-year, Sales/Assets increased to 0.0528 from 0.0476, while Assets/Equity decreased to 2.32 from 2.46. The stock is a short squeeze candidate, with a short float at 10.31% (equivalent to 19.94 days of average volume). The stock has had a good month, gaining 11.55%.

10. priceline.com Incorporated (NASDAQ:PCLN): Operates as an online travel company. Market cap of $24.34B. Analyst projected EPS growth over the next 5 years at 26.45%. MRQ Net Profit Margin increased to 23.25% from 14.98% year-over-year, Sales/Assets increased to 0.33 from 0.31, while Assets/Equity decreased to 1.69 from 1.77. The stock has gained 28.29% over the last year.

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

Source: 10 High-Growth Stocks With Strong Sources Of Profitability