Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends insight into how well a company is run and the headwinds weighing on it. Arcos Dorados Holdings Inc. ARCO, Navigator Holdings Ltd. NVGS, Veritiv Corporation VRTV and Delta Air Lines, Inc. DAL 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 attracts investors and draws well-skilled employees, who eventually enhance business value.
Moreover, a higher net profit margin compared with its peers provides the 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.
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.
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 discuss our four picks from the 25 stocks that qualified the screen:
Arcos Dorados operates as a franchisee of McDonald’s, with its operations divided in Brazil, the North Latin America division; South Latin America and the Caribbean division. It also runs quick-service restaurants in Latin America and the Caribbean. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 earnings has been revised upward by 4 cents to 76 cents per share in the past seven days. ARCO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 23.5%.
Navigator Holdings provides international seaborne transportation and regional distribution services related to liquefied petroleum gas, petrochemical gases and ammonia for energy companies, industrial users and commodity traders. It currently flaunts a Zacks Rank of 1 and has a VGM Score of B.
The Zacks Consensus Estimate for Navigator Holdings’ 2023 earnings has been increased by 6 cents to $1.16 per share in the past 30 days. NVGS surpassed the Zacks Consensus Estimate twice in the trailing four quarters while missing the same on two occasions, the average negative surprise being 16.2%.
Veritiv engages in offering North American business-to-business distribution solutions. It provides packaging, print and print management, publishing, supply chain, facility and logistics solutions that span the entire lifecycle of core business operations. The company currently carries a Zacks Rank #2 and has a VGM Score of A.
The Zacks Consensus Estimate for VRTV’s 2023 earnings has been revised upward to $20.25 per share from $20.20 in the past 30 days. Veritiv surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 14.3%.
Delta Air Lines is one of the four carriers that controls the majority of the U.S. aviation market (the carriers account for more than 60% of the domestic market share). It has hubs and market presence in Amsterdam, London-Heathrow, Mexico City, Paris-Charles de Gaulle and Seoul-Incheon. As of Dec 31, 2022, Delta Air Lines’ fleet included roughly 1,250 aircraft. The stock carries a Zacks Rank of 2 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Delta Air Lines’ 2023 earnings has been revised upward by 4 cents to $6.67 per share in the past seven days. DAL surpassed the Zacks Consensus Estimate twice in the trailing four quarters while missing the same on two occasions, the average surprise being 2.1%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
Veritiv Corporation (VRTV): Free Stock Analysis Report
Navigator Holdings Ltd. (NVGS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Source: Read Full Article