Earnings Watch: 7 Companies With Strong Sources of Profits

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Results are starting to come in for the 2011 4Q performance of U.S. companies, beginning with Alcoa this past Monday. The aluminum maker surprised the market with higher than expected revenue and a bullish outlook for 2012. Do you have a watchlist for the other companies soon reporting?

Earnings season is always a big stock price mover. Every quarter, companies release their earnings over the last quarter, their revenues, and their outlooks for the future. Analysts use these reports as a way to reassess their target prices on the companies and their outlooks on the economy. Investors pay close attention too for any signs of unexpected change.

Business section: Investing ideas
For ideas on how to create a watch list, we ran a screen on next week's reporting companies. We screened these stocks for those with strong sources of profitability, measured by DuPont analysis on return on equity (ROE).

DuPont analyzes return on equity (or net income/equity) profitability by breaking ROE up into three components:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus 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.

Do you think these companies' profitability will continue through this earnings season?

List sorted by increase in ROE. (Click here to access free, interactive tools to analyze these ideas.)

1. General Electric (NYS: GE) : Operates as a technology, service, and finance company worldwide. Market cap of $199.11B. 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.

2. Meridian Bioscience: Develops, sells, and distributes diagnostic test kits. Market cap of $773.66M. 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.

3. Intuitive Surgical (NAS: 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 $17.60B. 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.

4. Parker Hannifin: Manufactures fluid power systems, electromechanical controls, and related components. Market cap of $11.91B. 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.

5. Skyworks Solutions (NAS: SWKS) : Offers analog and mixed signal semiconductors worldwide. Market cap of $3.35B. 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.

6. Union Pacific (NYS: UNP) : Provides rail transportation services in North America. Market cap of $52.89B. 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.

7. Western Digital (NYS: WDC) : Engages in the design, development, manufacture, and sale of hard drives worldwide. Market cap of $7.89B. 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.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Data compiled by Danny Guttridge. Kapitall's by Alexander Crawford, and Danny Guttridge do not own any of the shares mentioned above. Accounting data sourced from Google Finance.

At the time this article was published The Motley Fool owns shares of Western Digital. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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