4 Stocks With a Solid Net Profit Margin Worth Buying
Investors prefer to put their money in businesses that reap profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin reflects a company’s efficiency in converting sales into actual profits. Virco Manufacturing Corporation VIRC, H&E Equipment Services, Inc. HEES, Alpha Metallurgical Resources, Inc. AMR and Photronics, Inc. PLAB boast solid net profit margins.
Net Profit Margin = Net profit/Sales * 100.
In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. In fact, the net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.
Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric not only attracts investors but also draws well-skilled employees who eventually enhance a business's value.
Moreover, a higher net profit margin compared with its peers provides the company with a competitive edge.
Pros and Cons
Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.
However, net profit margin as an investment criterion has its share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that important for technology companies.
In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.
Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing a company’s performance.
The Winning Strategy
A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.
Apart from these, we have added a few criteria to ensure maximum returns from this strategy.
Screening Parameters
Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.
Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.
Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the stock.
Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments. You can see the complete list of today’s Zacks #1 Rank stocks here.
VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here we discuss our four picks from the 21 stocks that qualified the screening:
Virco Manufacturing designs, produces and distributes quality furniture for the contract and education markets worldwide. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for Virco Manufacturing’s fiscal 2024 earnings has moved 20.5% north in the past 60 days and currently stands at $1.35 per share. Virco Manufacturing surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 188.6%.
H&E Equipment is one of the largest integrated equipment services companies in the United States, with full-service facilities throughout the Intermountain, Southwest, Gulf Coast & Southeast regions of the United States. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $4.50 per share for H&E Equipment’s 2023 earnings has remained unchanged over the past 60 days. HEES surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 21.4%.
Alpha Metallurgical is a mining company with operations principally in Virginia and West Virginia. The company supplies metallurgical products to the steel industry. At present, the stock has a Zacks Rank #1 and a VGM Score of A.
The Zacks Consensus Estimate for Alpha Metallurgical’s 2023 earnings has moved up by 8.8% to $44.60 per share in the past 30 days. AMR surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 9.6%.
Photronics is a leading worldwide manufacturer of photomasks. Photomasks are high-precision quartz plates that contain microscopic images of electronic circuits and are a key element in the manufacture of semiconductors and flat panel displays. Photomasks are used to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, a variety of flat panel displays, and, to a lesser extent, other types of electrical and optical components. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for Photronics’ fiscal 2024 earnings has moved up by 15.6% to $2.60 per share in the past 60 days. PLAB surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 8.5%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance/.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Alpha Metallurgical Resources, Inc. (AMR) : Free Stock Analysis Report
Photronics, Inc. (PLAB) : Free Stock Analysis Report
H&E Equipment Services, Inc. (HEES) : Free Stock Analysis Report
Virco Manufacturing Corporation (VIRC) : Free Stock Analysis Report
