• The First Cut
  • Stocks With a Competitive Edge

    by John Bajkowski

    Stocks With A Competitive Edge Splash image

    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.

    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
    John Bajkowski is president of AAII.


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