For Your Watchlist: 10 Companies With Solid Profitability

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Profitability is a powerful word for investors, but it also holds a lot of ambiguity. Profitable compared to what? Profitability based on what?

To address this issue we applied two different profitability measures on a universe of stocks with market caps over $300 million.

Industry averages
First, we compared companies' profit margins against their industry averages based on the following profit margins:

  • TTM Gross margin: This metric tells us the percentage of a company's revenue that's left after paying the costs for production of inventory.
  • TTM Operating margin: This is the percentage of sales remaining after all operating expenses are paid. Operating expenses include: supplies, repairs, research and development, and depreciation.
  • TTM Pre-tax margin: A company's earnings before taxes. This incorporates all of the expenses associated with business excluding taxes.

The DuPont equation
Next, we considered that it's important for investors to understand the sources for that profitable edge -- is it sustainable?

One of analysts' favorite profitability tools is DuPont analysis -- it's a way to look at changes in return on equity (ROE) profitability (i.e., net income/equity) by attributing those changes to certain sources.

Some of the sources are more sustainable than others, thereby giving an analysis of strength in increasing profitability.

DuPont analysis breaks up a company's ROE into three components: net margin, asset turnover, and leverage. Companies with increasing net margin, increasing asset turnover, and decreasing leverage are viewed favorably.

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Business section: Investing ideas
The following is a list of companies that are more profitable than their competitors and have encouraging DuPont breakdowns.

Do you think these names are appropriately valued? (Click here to access free, interactive tools to analyze these ideas.)

1. MasterCard (NYS: MA) : Provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers' cheque programs. TTM gross margin at 54.31% vs. industry average at 46.48%. TTM operating margin at 51.45% vs. industry average at 30.25%. TTM pre-tax margin at 51.99% vs. industry average at 26.6%. MRQ net profit margin at 39.44% vs. 36.27% y/y. MRQ sales/assets at 0.188 vs. 0.175 y/y. MRQ assets/equity at 1.62 vs. 1.686 y/y.

2. CEVA: With its subsidiaries engage in designing and licensing silicon intellectual property (SIP) for the handsets, portable multimedia, and consumer electronics markets. TTM gross margin at 94.32% vs. industry average at 59.98%. TTM operating margin at 30.36% vs. industry average at 24.37%. TTM pre-tax margin at 34.81% vs. industry average at 23.4%. MRQ net profit margin at 33.2% vs. 28.% y/y. MRQ sales/assets at 0.07 vs. 0.062 y/y. MRQ assets/equity at 1.089 vs. 1.111 y/y.

3. Wright Express: Provides payment processing and information management products and services to the commercial and government vehicle fleet industry in the United States, Canada, New Zealand, Australia, and Europe. TTM gross margin at 50.4% vs. industry average at 46.48%. TTM operating margin at 41.85% vs. industry average at 30.25%. TTM pre-tax margin at 35.38% vs. industry average at 26.6%. MRQ net profit margin at 31.67% vs. 20.52% y/y. MRQ sales/assets at 0.061 vs. 0.048 y/y. MRQ assets/equity at 3.747 vs. 3.977 y/y.

4. FleetCor Technologies: Provides specialized payment products and services to commercial fleets, oil companies, and petroleum marketers in North America, Europe, Africa, and Asia. TTM gross margin at 51.29% vs. industry average at 46.48%. TTM operating margin at 45.2% vs. industry average at 30.25%. TTM pre-tax margin at 37.09% vs. industry average at 26.6%. MRQ net profit margin at 30.18% vs. 29.91% y/y. MRQ sales/assets at 0.077 vs. 0.074 y/y. MRQ assets/equity at 2.283 vs. 2.629 y/y.

5. DuPont Fabros Technology: Engages in the ownership, acquisition, development, operation, management, and lease of large-scale data center facilities in the United States. TTM gross margin at 69.74% vs. industry average at 39.7%. TTM operating margin at 38.25% vs. industry average at 37.26%. TTM pre-tax margin at 27.54% vs. industry average at 15.16%. MRQ net profit margin at 26.46% vs. 17.93% y/y. MRQ sales/assets at 0.03 vs. 0.025 y/y. MRQ assets/equity at 1.956 vs. 2.955 y/y.

6. KLA-Tencor: Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. TTM gross margin at 62.17% vs. industry average at 59.98%. TTM operating margin at 36.26% vs. industry average at 24.37%. TTM pre-tax margin at 34.48% vs. industry average at 23.4%. MRQ net profit margin at 24.11% vs. 22.6% y/y. MRQ sales/assets at 0.174 vs. 0.17 y/y. MRQ assets/equity at 1.556 vs. 1.71 y/y.

7. CARBO Ceramics (NYS: CRR) : CARBO Ceramics manufactures and supplies ceramic proppants primarily used in the hydraulic fracturing of natural gas and oil wells in the United States and internationally. TTM gross margin at 47.06% vs. industry average at 34.89%. TTM operating margin at 31.01% vs. industry average at 18.15%. TTM pre-tax margin at 30.5% vs. industry average at 16.23%. MRQ net profit margin at 22.09% vs. 17.03% y/y. MRQ sales/assets at 0.241 vs. 0.203 y/y. MRQ assets/equity at 1.165 vs. 1.168 y/y.

8. American Electric Power (NYS: AEP) : Engages in the generation, transmission, and distribution of electric power to retail customers. TTM gross margin at 31.27% vs. industry average at 27.%. TTM operating margin at 20.26% vs. industry average at 18.29%. TTM pre-tax margin at 16.17% vs. industry average at 14.%. MRQ net profit margin at 21.44% vs. 13.68% y/y. MRQ sales/assets at 0.085 vs. 0.081 y/y. MRQ assets/equity at 3.479 vs. 3.638 y/y.

9. Weight Watchers International (NYS: WTW) : Provides weight management services worldwide. TTM gross margin at 58.63% vs. industry average at 52.95%. TTM operating margin at 29.62% vs. industry average at 21.53%. TTM pre-tax margin at 25.92% vs. industry average at 18.69%. MRQ net profit margin at 18.82% vs. 13.44% y/y. MRQ sales/assets at 0.394 vs. 0.3 y/y. MRQ assets/equity at -2.309 vs. -1.548 y/y.

10. Las Vegas Sands (NYS: LVS) : Develops, and operates various integrated resort properties primarily in the United States, Macau, and Singapore. TTM gross margin at 47.99% vs. industry average at 37.26%. TTM operating margin at 25.02% vs. industry average at 19.43%. TTM pre-tax margin at 21.67% vs. industry average at 17.92%. MRQ net profit margin at 17.63% vs. 11.24% y/y. MRQ sales/assets at 0.11 vs. 0.094 y/y. MRQ assets/equity at 2.678 vs. 3.072 y/y.

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.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen does not own any of the shares mentioned above.Profitability data sourced from Fidelity and Google Finance.

At the time this article was published The Motley Fool owns shares of Mastercard. 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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