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A Deep Analysis of 6 Five-Star Companies

- By James Li

Among U.S. companies, six have maintained a GuruFocus Business Predictability Rank of five stars year over year since June 2012: Jack Henry & Associates Inc. (JKHY), Mednax Inc. (MD), Mesa Laboratories Inc. (MLAB), Rollins Inc. (ROL), Tyler Technologies Inc. (TYL) and World Acceptance Corp. (WRLD).


Brief introduction of Predictability Rank

GuruFocus ranks a company's business predictability by looking at the historical trend of revenue per share and the EBITDA per share for the past 10 years. Companies that had operating loss in the past decade get a flat one-star predictability rank. Otherwise, the company's predictability rank ranges from two to five stars in half-star increments.

Berkshire Hathaway Inc. (BRK-A)(BRK-B) CEO Warren Buffett (Trades, Portfolio) lists four criteria to determine good companies, including high business predictability and durable competitive advantage. Four of our value screeners require a predictability rank of at least four stars: the Undervalued Predictable Screener, the Buffett-Munger Screener, the Historical Low Price-Sales Screener and the Historical Low Price-Book Screener.

Jack Henry & Associates

Jack Henry & Associates, a Missouri-based business services company, provides information processing solutions for community banks. The company has a profitability rank of 9, suggesting good short-term growth potential.

Jack Henry's Piotroski F-score ranks an excellent 8 of 9, driven by consistent gross margin growth and increasing asset turnover during the past three quarters. The company has three positive investing signs, including expanding operating margins and consistent revenue growth over the past five years.

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Jack Henry reported a 6% year-over-year increase in net revenues for the quarter ending March 31, driven by higher sales in the company's three business segments. CEO David Foss praised the company's associates for producing solid third-quarter results and making efforts to increase quota targets for the upcoming quarter. The higher sales contributed to profit margins outperforming over 90% of global competitors.

Mednax

Mednax provides various physician services, including newborn, maternal-fetal and pediatric subspecialty care. The Ft. Lauderdale, Florida-based company has good profitability albeit contracting operating margins and a low Piotroski score of 3.

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Mednax reported $836 million in net revenues for the first quarter compared to $753 million from the prior-year quarter. While the company's operating results "reflected challenges" due to several factors, CEO Roger Medel still expects the company to overcome the setbacks and "execute on [Mednax's] strategic development and growth." Despite this, management expects a second-quarter EBIDTA decline of 8-12% compared to the prior-year period. This can potentially jeopardize Mednax's five-star predictability rank going forward.

Mesa Laboratories

Mesa Laboratories, a Colorado-based medical instruments company, focuses on quality control products, which are sold into niche markets driven by regulatory requirements. Although the company's profitability ranks 8 out of 10, Mesa Laboratories has contracting profit margins, which imply declining growth potential. The company's operating margin and net margin are near 10-year lows of 17.86% and 12.24%.

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Mesa Laboratories is significantly overvalued as its share price, price-earnings ratio and price-book ratio are near a 10-year high. While the company's price-sales ratio is only near a three-year high, it still trades near its 10-year maximum price-sales valuation.

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Rollins

Rollins, an Atlanta-based insect control company, provides pest and termite control services to residential and commercial customers around the world. The company's financial strength ranks 9 out of 10, suggesting a robust business operation.

Rollins reported strong first-quarter results, including a 6.4% year-over-year increase in revenue and a 26.1% year-over-year increase in net income compared to the prior-year quarter. These earnings results contributed to profit margins outperforming over 80% of global competitors. The company has four positive investing signs, including consistent revenue growth and no long-term debt.

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Tyler Technologies

Tyler Technologies, a Plano, Texas-based application software company, provides integrated information management solutions and services for cities, counties, schools and other local government entities. The company's profitability ranks 9 out of 10, suggesting good short-term growth potential.

Tyler Technologies reported strong earnings results for the first quarter, including a 15.3% increase in recurring maintenance and subscription revenues and a 18.5% increase in software backlog from March 2016-17. These results contributed to expanding operating and net margins, which are near a 10-year high and outperform over 83% of global competitors. CEO John Marr expects full-year revenues to range between $844 million to $854 million, which would outperform prior-year revenues by approximately $100 million.

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World Acceptance

World Acceptance, a South Carolina-based small loan consumer finance company, provides a variety of credit insurance products to customers. Unlike the other five companies mentioned, World Acceptance has a five-star predictability rank on watch, implying current business trends have deviated from historical business trends. The company's operating margin, which is near a 10-year low of 22.34%, has declined approximately 2.3% per year over the past five years.

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World Acceptance has three medium warning signs, including contracting revenues during the trailing 12 months. For the quarter ending March 31, the company reported a meager 0.3% year-over-year increase in total revenues, with interest and fee incomes tumbling 1.6% from the prior-year quarter. The lower interest incomes were driven by "elevated net charge-offs and delinquencies compared to historical levels," according to management. Full-year net incomes took a 15.8% nosedive from the prior year while full-year net revenues tumbled 4.6%.

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See also: a summary of new GuruFocus features

GuruFocus introduced several new features to its members, including bar graphs in Interactive Charts, screening using historical data and the extension of financial data to 30 years.

We encourage our writers to create bar graphs if the chart has less than three series. You can create bar graphs to show two financial series in one chart, e.g., revenue and net income. The following three bar graphs illustrate this feature for Apple Inc. (AAPL):

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Apple revenue and net income bar graph

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Apple operating margin and net margin bar graph

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Apple Piotroski F-score and Altman Z-score bar graph

Premium members will see a new "Use history data" option near the upper right corner of the All-in-one Guru Screener like the one shown in Figure 1.

Figure 1

As the name suggests, the "Use history data" option allows you to screen for companies that met certain criteria during a past month. For example, you may want to look for companies that had a Piotroski F-score of at least 7 out of 9 in June 2015 or June 2016. Premium members can screen using history data up to three years, the same limit applied to premium members for the Backtesting feature. Premium Plus members can screen using history data up to 2006.

Disclosure: The author has no positions in the stocks mentioned in this article.

This article first appeared on GuruFocus.


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