Screen of the Week: Increasing Sales and Profit Margins

By: Kevin Matras
July 21, 2010

This week I want to focus on Sales Growth and Profit Margins. While everybody understands sales, margins might bring up a few question marks. And with earnings season officially underway, now is the perfect time to look at this.

So let’s start at the beginning: first and foremost, sales are THE most important thing to a company. Everything else stems from that. Without sales, there really wouldn’t be anything else to analyze. And Sales Growth numbers show you how that company is growing.

However, just because sales are increasing doesn’t always mean that profits are increasing too. Sales at the expense of profits does not work. So paying attention to Profit Margins is the next thing we’re going to want to look at.

Margin is simply a ratio and the calculation is: Net Income divided by Sales

So if a company’s margin is 15% for instance, that means the company’s net income is 15 cents for every $1 of sales it makes. But if a company’s expenses are growing faster than their sales, this’ll reduce their margins. In general, a company with increasing margins is becoming more profitable and is better managed, i.e., their costs are under control.

So this earnings season, dig deeper into the numbers. Yes, look at their sales. And of course, look at their earnings. But take a look at their profit margins as well. Are they going up or down? In other words, are they making more on each dollar of sales or less? This is important stuff to know, and could make the difference between investors buying a company’s earnings announcement, or selling it.

Parameters for this week’s screen:

* 12 Month Trailing Sales Growth (Current / 1 Quarter Ago) greater than or equal to their relevant Industry average (Looking for the top companies in their industries.)

* Current Net Margin greater than or equal to 5 Yr. Avg. Net Margin (Steady to increasing Net Profits is what we’re after.)

* Current Net Margin greater than or equal to Net Margin from 1 Quarter Ago (If a company’s profit margin fell last quarter, there’s a chance it might fall yet again. So we’re excluding those companies whose margins fell in the previous quarter.)

* Zacks Rank equal to 1 (The Zacks Rank is one of the best, if not the best rating system out there. One of the main components to the Zacks Rank is Earnings Estimate Revisions. The whole idea being: companies that receive upward estimate revisions have a tendency of receiving even more upward estimate revisions. And this helps paint a solid picture moving forward.)

Here are 5 stocks that passed this screen this week:

CTB -Cooper Tire & Rubber Company
OMN- OMNOVA Solutions Inc.
AAPL- Apple Inc.
FNSR- Finisar Corporation
NVLS- Novellus Systems, Inc.

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.