There is a lot more to profitability than whether a company's bottom line is growing. Profits can come from several sources, with some better than others. To get a deeper look into a company's profit trends, we performed DuPont analysis on companies reporting their 2011 Q4 earnings next week.
DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:
- (Net Profit/Equity)
- (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
- (Net Profit margin)*(Asset turnover)*(Leverage ratio)
We therefore focus on companies that have 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial 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 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 will continue to see strong sources of profitability? Use this list as a starting point for your own analysis.
List sorted by increase in ROE.
1. General Electric Company (GE): Operates as a technology, service, and finance company worldwide. Market cap of $197.63B. Earnings to be announced on 01/20. MRQ Net Profit Margin increased to 9.12% from 5.81% year-over-year, Sales/Assets increased to 0.0479 from 0.0466, while Assets/Equity decreased to 5.93 from 6.57. The stock has had a good month, gaining 15.91%.
2. Meridian Bioscience Inc. (VIVO): Develops, sells, and distributes diagnostic test kits. Market cap of $783.15M. Earnings to be announced on 01/16. MRQ Net Profit Margin increased to 16.23% from 14.97% year-over-year, Sales/Assets increased to 0.27 from 0.23, while Assets/Equity decreased to 1.12 from 1.13. The stock is a short squeeze candidate, with a short float at 12.21% (equivalent to 18.87 days of average volume). The stock has lost 14.88% over the last year.
3. Intuitive Surgical, Inc. (ISRG): Designs, manufactures, and markets da Vinci surgical systems for various surgical procedures, including urologic, gynecologic, cardiothoracic, general, and head and neck surgeries. Market cap of $17.55B. Earnings to be announced on 01/19. MRQ Net Profit Margin increased to 27.40% from 25.15% year-over-year, Sales/Assets increased to 0.16 from 0.15, while Assets/Equity decreased to 1.16 from 1.17. The stock has gained 65.77% over the last year.
4. Digi International Inc. (DGII): Operates as a device networking company that develops products and technologies to connect and manage local or remote electronic devices over a network, via the Internet or via satellite. Market cap of $300.76M. Earnings to be announced on 01/19. MRQ Net Profit Margin increased to 5.50% from 4.74% year-over-year, Sales/Assets increased to 0.1813 from 0.1771, while Assets/Equity decreased to 1.09 from 1.11. The stock is a short squeeze candidate, with a short float at 6.45% (equivalent to 13.66 days of average volume). The stock has had a good month, gaining 14.22%.
5. Parker Hannifin Corporation (PH): Manufactures fluid power systems, electromechanical controls, and related components. Market cap of $12.27B. Earnings to be announced on 01/16. MRQ Net Profit Margin increased to 9.18% from 8.74% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 2.06 from 2.19. The stock has lost 5.26% over the last year.
6. Skyworks Solutions Inc. (SWKS): Offers analog and mixed signal semiconductors worldwide. Market cap of $3.38B. Earnings to be announced on 01/19. MRQ Net Profit Margin increased to 15.96% from 14.94% year-over-year, Sales/Assets increased to 0.21 from 0.20, while Assets/Equity decreased to 1.17 from 1.19. The stock has had a couple of great days, gaining 6.9% over the last week.
7. Union Pacific Corporation (UNP): Provides rail transportation services in North America. Market cap of $53.80B. Earnings to be announced on 01/19. MRQ Net Profit Margin increased to 17.72% from 17.65% year-over-year, Sales/Assets increased to 0.11 from 0.10, while Assets/Equity decreased to 2.43 from 2.47. The stock has had a good month, gaining 10.95%.
8. Western Digital Corp. (WDC): Engages in the design, development, manufacture, and sale of hard drives worldwide. Market cap of $7.84B. Earnings to be announced on 01/18. MRQ Net Profit Margin increased to 8.87% from 8.22% year-over-year, Sales/Assets increased to 0.32 from 0.31, while Assets/Equity decreased to 1.48 from 1.56. The stock has had a couple of great days, gaining 8.23% 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.
