There are many ways to interpret a company's profitability numbers, so finding the best way can be a difficult task. One of the most popular profitability measures among analysts is DuPont analysis of return on equity profitability. This breaks down the sources of profits into those that are preferred and those that aren't preferred.
To illustrate this, we ran DuPont analysis on highly undervalued stocks, with PEG below 1 and P/FCF below 15. DuPont analyzes return on equity (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)
It therefore focuses on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage. The companies listed below have all three positive attributes found from DuPont.
Interactive Chart: Press Play to compare changes in market cap 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 point for your own analysis.
1. Apple Inc. (AAPL): Designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. PEG at 0.89. P/FCF at 14.74. MRQ net profit margin at 28.2% vs. 22.45% y/y. MRQ sales/assets at 0.334 vs. 0.308 y/y. MRQ assets/equity at 1.54 vs. 1.587 y/y.
2. Advance America, Cash Advance Centers Inc. (AEA): Provides cash advance services in the United States, the United Kingdom, and Canada. PEG at 0.64. P/FCF at 4.15. MRQ net profit margin at 14.54% vs. 9.83% y/y. MRQ sales/assets at 0.375 vs. 0.371 y/y. MRQ assets/equity at 1.684 vs. 1.836 y/y.
3. CF Industries Holdings, Inc. (CF): Manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. PEG at 0.83. P/FCF at 7.01. MRQ net profit margin at 25.54% vs. 16.18% y/y. MRQ sales/assets at 0.191 vs. 0.141 y/y. MRQ assets/equity at 1.974 vs. 2.161 y/y.
4. Dice Holdings, Inc. (DHX): Provides online recruiting and career development services. PEG at 0.99. P/FCF at 10.74. MRQ net profit margin at 22.09% vs. 15.15% y/y. MRQ sales/assets at 0.145 vs. 0.119 y/y. MRQ assets/equity at 1.56 vs. 1.788 y/y.
5. HFF Inc. (HF): Provides commercial real estate and capital markets services to the commercial real estate industry in the United States. PEG at 0.97. P/FCF at 8.22. MRQ net profit margin at 16.67% vs. 8.75% y/y. MRQ sales/assets at 0.159 vs. 0.147 y/y. MRQ assets/equity at 3.772 vs. 3.904 y/y.
6. Nacco Industries Inc. (NC): Engages in lift trucks, small appliances, specialty retail, and mining businesses primarily in the Americas, Europe, and the Asia-Pacific. PEG at 0.27. P/FCF at 9.51. MRQ net profit margin at 5.72% vs. 4.43% y/y. MRQ sales/assets at 0.528 vs. 0.522 y/y. MRQ assets/equity at 3.126 vs. 3.707 y/y.
7. Protective Life Corp. (PL): Engages in the production, distribution, and administration of insurance and investment products in the United States. PEG at 0.94. P/FCF at 4.81. MRQ net profit margin at 10.13% vs. 9.94% y/y. MRQ sales/assets at 0.017 vs. 0.017 y/y. MRQ assets/equity at 12.542 vs. 14.278 y/y.
8. Portfolio Recovery Associates Inc. (PRAA): Provides outsourced receivables management and related services in the U. PEG at 0.78. P/FCF at 7.38. MRQ net profit margin at 22.52% vs. 20.49% y/y. MRQ sales/assets at 0.11 vs. 0.101 y/y. MRQ assets/equity at 1.799 vs. 2.03 y/y.
9. Providence Service Corp. (PRSC): Provides and manages government sponsored social services and non-emergency transportation services. PEG at 0.98. P/FCF at 10.22. MRQ net profit margin at 2.32% vs. 1.97% y/y. MRQ sales/assets at 0.645 vs. 0.567 y/y. MRQ assets/equity at 3.714 vs. 4.731 y/y.
10. Symetra Financial Corporation (SYA): Operates as a financial services company in the life insurance industry in the United States. PEG at 0.81. P/FCF at 1.48. MRQ net profit margin at 13.21% vs. 12.56% y/y. MRQ sales/assets at 0.02 vs. 0.019 y/y. MRQ assets/equity at 9.002 vs. 10.769 y/y.
11. TriMas Corporation (TRS): Designs, manufacturers, and distributes various products for commercial, industrial, and consumer markets worldwide. PEG at 0.70. P/FCF at 12.59. MRQ net profit margin at 5.1% vs. 2.68% y/y. MRQ sales/assets at 0.263 vs. 0.23 y/y. MRQ assets/equity at 5.677 vs. 8.242 y/y.
*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.