Buy 4 Stocks With Solid Net Profit Margin for Optimum Returns
The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding shareholders. Net profit margin is an effective tool to measure the profits reaped by a business.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric gives insight into how well a company is run and the headwinds weighing on it. Modine Manufacturing MOD, Karat Packaging KRT, Huron Consulting HURN and Graham Corporation GHM 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, 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’ value.
Moreover, a higher net profit margin compared with its peers provides a 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 have picked four stocks — Modine Manufacturing, Karat Packaging, Huron Consulting and Graham Corporation — from the 30 stocks that qualified the screen:
Modine Manufacturing operates primarily in a single industry consisting of the manufacture and sale of heat transfer equipment. These include heat exchangers for cooling all types of engines, transmissions, auxiliary hydraulic equipment, air conditioning components used in cars, trucks, farm and construction machinery and equipment, and heating and cooling equipment for residential and commercial building heating, ventilating, air conditioning and refrigeration equipment. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $2.72 per share for Modine Manufacturing’s fiscal 2024 earnings has moved 6.3% north in the past seven days. MOD surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 44.7%.
Karat Packaging is a specialty distributor and manufacturer of disposable foodservice products and related items. Its products include food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. The company also offers customized solutions, including new product development and design, printing and logistics services. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for Karat Packaging’s current-year earnings has moved up to $1.73 per share from $1.43 seven days ago. KRT surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 48.8%.
Huron Consulting is the parent company of Huron Consulting Services LLC, an independent provider of financial and operational consulting services. Huron's experienced and credentialed professionals employ their expertise in accounting, finance, economics and operations to a wide variety of both financially sound and distressed organizations, including Fortune 500 companies, medium-sized businesses, leading academic institutions, healthcare organizations and the law firms that represent these various organizations. The stock flaunts a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for Huron Consulting’s 2023 earnings has been revised upward to $4.52 per share from $4.13 in the past 60 days. HURN surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 21.8%.
Graham designs and builds vacuum and heat transfer equipment for process industries and energy markets worldwide. The company's products include steam jet ejector vacuum systems and liquid ring vacuum pumps, surface condensers, Heliflows, water heaters, and various types of heat exchangers. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for Graham’s fiscal 2024 earnings has moved up by 66.7% to 15 cents per share in the past seven days. GHM surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 243.1%.
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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/.
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Huron Consulting Group Inc. (HURN) : Free Stock Analysis Report
Graham Corporation (GHM) : Free Stock Analysis Report
Modine Manufacturing Company (MOD) : Free Stock Analysis Report
Karat Packaging Inc. (KRT) : Free Stock Analysis Report
