Solid Net Profit Margin Makes These 4 Stocks Worth Buying
The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding a company’s shareholders. Net profit margin is an effective tool for measuring 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. Louisiana-Pacific Corporation LPX, PDC Energy, Inc. PDCE, Encore Wire Corporation WIRE and TimkenSteel TMST 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’ 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 - Louisiana-Pacific, PDC Energy, Encore Wire and TimkenSteel - from the 55 stocks that qualified the screen:
Louisiana-Pacific is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Louisiana-Pacific’s 2022 earnings has been revised upward to $13.02 per share from $12.43 in the past seven days. LPX surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 13.3%.
PDC Energy is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. At present, the stock has a Zacks Rank #1 and a VGM Score of A.
The Zacks Consensus Estimate of $13.32 for PDC Energy’s current-year earnings has moved eight cents north in the past seven days. PDCE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 47.3%.
Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire sports a Zacks Rank of 1, at present, and has a VGM Score of A.
The Zacks Consensus Estimate for Encore Wire’s 2022 earnings has been revised upward to $10.74 per share from $9.76 in the past 60 days. WIRE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 298.1%.
TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for TimkenSteel’s 2022 earnings has been revised upward to $3.55 from $3.30 in the past 30 days. TMST surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 41.3%.
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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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LouisianaPacific Corporation (LPX) : Free Stock Analysis Report
PDC Energy, Inc. (PDCE) : Free Stock Analysis Report
Encore Wire Corporation (WIRE) : Free Stock Analysis Report
Timken Steel Corporation (TMST) : Free Stock Analysis Report
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