With earnings season still in full swing, I wanted to talk this week about Sales Growth and Profit Margins.
Earnings always seem to grab the bulk of the headlines. But without sales there wouldn't be any earnings to speak of. And the earnings everybody talks about are directly derived from the profit margins on those sales.
While everybody understands sales, margins might bring up a few question marks.
So let's start at the beginning: first and foremost, sales are THE most important thing to a company. Everything else stems from that. And Sales Growth numbers show you how that company is growing.
However, increasing sales doesn't always mean that profits are increasing too. Sales at the expense of profits does not work. So paying attention to Profit Margins is the next thing we're going to want to look at.
I don't want to pile onto Apple, but while their sales are up, their net margins have contracted in each of the last three quarters. And that has corresponded with the decline in price. Just an example of how important margins are to the outlook of a company.
Margin is simply a ratio. And the calculation is:
Net Income divided by Sales
So if a company's margin is 15%, for instance, that means its net income is 15 cents for every $1 dollar of sales it makes.
But if a company's expenses are growing faster than their sales, this will reduce their margins.
In general, a company with increasing margins is becoming more profitable and is better managed, i.e., their costs are under control.
So this earnings season, dig deeper into the numbers. Yes, look at their sales. And of course, look at their earnings. But take a look at their profit margins as well. Are they going up or down? In other words, are they making more on each dollar of sales they make, or less?
This is important stuff to know, and could make the difference between investors buying a company's earnings announcement, or selling it.
Parameters for this week's screen:
- 12 Month Trailing Sales Growth (Current / 1 Quarter Ago) greater than their relevant Industry median. (Looking for the top companies in their industries.)
- Current Net Margin greater than or equal to 5 Yr. Avg. Net Margin. (Steady to increasing Net Profits is what we're after.)
- Current Net Margin greater than or equal to Net Margin from 1 Quarter Ago. (If a company's profit margin fell last quarter, there's a chance it might fall yet again. So we're excluding those companies whose margins fell in the previous quarter.)
- Zacks Rank equal to 1 (Strong Buy)
(Only the top Zacks Ranked stocks can get thru.)
Here are 5 stocks that passed this screen this week:
Zacks Rank #1s (Strong Buys) with increasing sales and increasing profit margins means more of their sales will fall to the bottom line, thus boosting earnings even more.
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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: http://www.zacks.com/performance.
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