Investors prefer to put their money in businesses that reap 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 reflects the company’s efficiency in converting sales into actual profits.
TimkenSteel
TMST
,
ModivCare
MODV
,
Capital Product Partners
CPLP
,
Euroseas
ESEA
and
DLH Holdings
DLHC
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 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 own 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 environment. 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 discuss our five picks from the 39 stocks that qualified the screen:
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 $3.05 from $2.50 in the past 60 days. TMST surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 59.2%.
ModivCare
is a technology-enabled healthcare services company. It provides a suite of integrated supportive care solutions for public and private players and their patients. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for ModivCare’s 2022 earnings has been revised upward to $7.84 from $7.69 in the past 30 days. MODV has surpassed the Zacks Consensus Estimate in three out of the trailing four quarters while missing the same on one occasion, the average surprise being 12.3%.
Capital Product Partners
is an international shipping company and a leader in the seaborne transportation of refined oil products and chemicals. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Capital Product Partners’ current-year earnings has moved up to $4.50 from $3.52 in the past 60 days. CPLP has surpassed the Zacks Consensus Estimate twice in the trailing four quarters while missing the same on two occasions, the average surprise being 11.4%.
Euroseas
was formed under the laws of the Republic of the Marshall Islands to consolidate the ship-owning interests of the Pittas family of Athens, Greece, which has been in the shipping business for the last 136 years. It operates in the dry cargo, dry bulk and container shipping markets. At present, the stock has a Zacks Rank #1 and a VGM Score of A.
The Zacks Consensus Estimate of $7.15 for Euroseas’ current-year earnings has moved 9.2% north in the past seven days. ESEA surpassed the Zacks Consensus Estimate once in the trailing four quarters while missing the same on three occasions, the average negative surprise being 60.7%.
DLH Holdings
serves clients throughout the United States as a full-service provider of healthcare, logistics, and technical support services to the Department of Defense and Federal agencies. The company sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for DLH Holdings’ fiscal 2022 earnings has been revised upward to $1.25 from $1.09 in the past 30 days. DLHC surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 14.1%.
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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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