Stocks With a Competitive Edge
by John Bajkowski
Earnings are dependent on the ability of a company to convert sales into profits. Converting a large and growing proportion of sales into earnings often points to firms that have a competitive advantage, due to brand-name loyalty, a limited niche, or even patent protection. The First Cut this issue screens for companies turning a larger percentage of sales into gross profits, operating profits and net profits.
Gross profit margin is calculated by dividing gross income (sales less the cost of goods sold) by sales. It reflects the firm’s basic pricing decisions and its material costs.
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Operating profit margin is calculated by dividing operating income by sales. Operating income represents income generated after all costs except interest, taxes, and non-operating items. The operating margin reflects the relationship between sales and management-controlled costs (the cost of goods sold, as well as operating costs including selling, administrative and general expenses; research and development expenses; and depreciation). It does not consider how the firm is financed or non-business activities. Net profit margin is calculated by dividing net income by sales. It indicates how well management has been able to turn sales into earnings available for shareholders.
The companies passing the First Cut are domestic exchanged-listed companies with positive sales growth coupled with gross, operating and net margins above their five-year averages and also showing improvement over the previous year. The 30 firms with the highest annual growth in sales over the last five years are presented in the table. While a number of industries made the cut, there is a strong concentration of educational firms. Historical earnings growth helps measure the success of converting sales into profits. The 52-week relative strength index compares performance relative to the S&P 500 and indicates that the market has already rewarded investors for holding many of these stocks. Investors generally pay a premium for firms that have some combination of cost control and pricing power over their goods and services.
| Company (Exchange: Ticker) | Operating | Net Margin | Sales | EPS | 52-Wk | ||||||
| Gross Margin | Margin | Growth | Growth | Rel | Share | ||||||
| Trailing | 5-Yr | Trailing | 5-Yr | Trailing | 5-Yr | Rate | Rate | Strgth | Price | ||
| 12 Mo | Avg | 12 Mo | Avg | 12 Mo | Avg | (5 Yr) | (5 Yr) | Index* | (6/12) | ||
| (%) | (%) | (%) | (%) | (%) | (%) | (%) | (%) | (%) | ($) | Description | |
| TransDigm Group Inc. (N: TDG) | 55.6 | 50.3 | 43.6 | 35.4 | 20.5 | 10.6 | 68.8 | 86.2 | 46 | 37.75 | aircraft components |
| Conceptus, Inc. (M: CPTS) | 79.6 | 63.7 | 4.3 | -81.1 | 1.9 | -78.0 | 67.7 | 14.9 | 31 | 16.42 | birth control device |
| Salesforce.com, Inc. (N: CRM) | 79.6 | 78.3 | 6.9 | 3.6 | 4.6 | 4.0 | 62.2 | 54.3 | -16 | 41.60 | customer mgmt software |
| Allion Healthcare, Inc. (M: ALLI) | 18.7 | 14.9 | 6.6 | 1.0 | 3.3 | -0.3 | 51.6 | 28.3 | 53 | 5.90 | disease mgmt servs |
| World Fuel Services Corp. (N: INT) | 2.6 | 2.0 | 1.0 | 0.7 | 0.7 | 0.5 | 47.3 | 29.6 | 159 | 41.79 | marine, air, & land fuel prods |
| American Public Education (M: APEI) | 60.4 | 55.5 | 24.9 | 15.1 | 15.3 | -0.9 | 43.2 | 84.7 | 33 | 35.07 | on-line education for military |
| Apple Inc. (M: AAPL) | 35.2 | 30.7 | 19.7 | 13.2 | 14.9 | 10.5 | 39.2 | 126.5 | 12 | 136.97 | PCs, iPods, cell phones |
| WMS Industries Inc. (N: WMS) | 62.4 | 55.0 | 18.2 | 9.6 | 12.3 | 6.4 | 29.5 | 53.0 | 19 | 28.90 | gaming machines |
| Morningstar, Inc. (M: MORN) | 74.2 | 72.3 | 28.2 | 21.9 | 19.1 | 14.1 | 29.2 | 51.8 | -12 | 43.10 | indep investment research |
| Almost Family, Inc. (M: AFAM) | 53.6 | 49.8 | 13.8 | 8.6 | 8.0 | 6.2 | 28.1 | 59.5 | 57 | 26.57 | home health services |
| Capella Education Co. (M: CPLA) | 56.8 | 53.5 | 15.9 | 11.2 | 11.2 | 10.2 | 27.2 | 33.6 | 25 | 54.28 | on-line college-level servs |
| Beacon Roofing Supply (M: BECN) | 24.1 | 24.1 | 6.7 | 5.6 | 3.2 | 1.7 | 26.1 | 28.2 | 80 | 14.60 | distribs roofing materials |
| Chart Industries, Inc. (M: GTLS) | 33.2 | 29.5 | 18.7 | 12.3 | 11.1 | 6.3 | 22.9 | 62.6 | -26 | 22.33 | liquid gas equip |
| MWI Veterinary Supply (M: MWIV) | 14.4 | 14.3 | 4.2 | 3.6 | 2.6 | 1.7 | 19.5 | 42.1 | 27 | 31.42 | animal health prods |
| Stericycle, Inc. (M: SRCL) | 45.2 | 44.4 | 26.1 | 25.7 | 14.3 | 13.2 | 19.0 | 18.8 | 27 | 49.69 | waste management |
| Apollo Group, Inc. (M: APOL) | 58.4 | 56.1 | 31.4 | 25.8 | 19.2 | 14.8 | 18.6 | 17.2 | 88 | 64.41 | private education |
| MICROS Systems, Inc. (M: MCRS) | 53.0 | 51.5 | 15.7 | 13.4 | 11.2 | 9.2 | 18.6 | 31.3 | 27 | 27.70 | info sys for hotels & stores |
| Monotype Imaging Hlds (M: TYPE) | 89.3 | 86.6 | 31.1 | 24.9 | 14.0 | -7.7 | 18.4 | 10.3 | -22 | 6.64 | text imaging solutions |
| Church & Dwight Co. (N: CHD) | 40.7 | 38.3 | 14.4 | 12.6 | 8.2 | 7.2 | 18.0 | 17.0 | 33 | 51.74 | household & personal prods |
| Syntel, Inc. (M: SYNT) | 45.0 | 40.7 | 25.8 | 21.1 | 22.9 | 18.8 | 18.0 | 16.2 | 15 | 29.38 | information technology |
| Valmont Industries, Inc. (N: VMI) | 27.0 | 25.6 | 12.2 | 8.9 | 7.1 | 4.8 | 17.9 | 36.6 | -6 | 74.70 | fabricated metal prods |
| Pegasystems Inc. (M: PEGA) | 63.3 | 62.6 | 10.9 | 1.8 | 7.4 | 4.8 | 17.4 | -9.2 | 206 | 26.58 | business automation software |
| Carter's, Inc. (N: CRI) | 35.4 | 35.3 | 9.5 | 8.5 | 5.3 | 3.3 | 16.2 | 22.9 | 144 | 24.44 | infant & toddler apparel |
| Thoratec Corporation (M: THOR) | 60.3 | 59.0 | 10.6 | 3.6 | 8.2 | 3.8 | 15.9 | 63.7 | 105 | 25.51 | medical devices for heart |
| Millipore Corporation (N: MIL) | 53.8 | 52.4 | 15.3 | 14.0 | 10.3 | 9.2 | 14.9 | 4.9 | 35 | 67.48 | servs for life science research |
| ITT Educational Services (N: ESI) | 63.2 | 55.6 | 33.6 | 25.5 | 20.8 | 16.2 | 14.2 | 32.4 | 80 | 92.72 | postsecondary education |
| Buckle, Inc., The (N: BKE) | 43.8 | 39.7 | 21.2 | 16.3 | 13.5 | 11.1 | 13.4 | 26.6 | 44 | 31.90 | retail casual apparel |
| FPL Group, Inc. (N: FPL) | 34.1 | 32.3 | 17.5 | 14.4 | 10.5 | 8.6 | 11.2 | 10.1 | 24 | 57.39 | electric utilities |
| Merit Medical Systems (M: MMSI) | 41.6 | 40.8 | 13.9 | 13.4 | 9.4 | 8.9 | 10.8 | 2.7 | 44 | 15.95 | single-use medical prods |
| Ross Stores, Inc. (M: ROST) | 23.8 | 22.7 | 7.8 | 7.0 | 4.8 | 4.3 | 10.6 | 9.6 | 53 | 39.43 | apparel chain & home stores |
| Exchange Key: M=NASDAQ; N=New York Stock Exchange. | *S&P 500 = 0. | ||||||||||
| Source: AAII's Stock Investor Pro, Thomson Reuters, and I/B/E/S. Data as of 6/12/2009. | |||||||||||
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