Give Me Those Fat Profit Margins
Posted: September 04, 2018
“Let me have men about me that are fat,” said Julius Caesar in a Shakespeare drama.
For my part, let me have companies about me that have fat profit margins.
For a company, as for a household, gross income minus expenses equals profit. The bigger the percentage difference, the fatter the profit margin. Companies that are innovative and provide a service its customers desperately need–or want–are likely to show impressive margins.
Here are five fat-margin stocks for your consideration.
While detractors see Intel (INTC) as a lumbering giant, vulnerable to new competitors, I see the world’s largest chip maker as a powerhouse. Analysts figure that earnings will be $4.14 a share this year, up from $2.30 four years ago. Does that sound like a company that’s losing its grip?
With that kind of growth, I think the stock is underpriced at about $48, or 14 times earnings. Intel has increased its dividend steadily. The dividend yield is 2.5% at the moment. The pretax profit margin was 32% in the latest quarter. After taxes, it was 29%.
People love the feature-rich iPhones from Apple (AAPL) and are willing to pay for them. A single gadget gives them weather, sports, stock quotes, a flashlight, news, navigation programs and the phone numbers of all their friends. Apple’s computers also have a loyal following.
That’s why Apple has a pretax profit margin of about 28%. (It’ about 21% after taxes.) After years of reaping fat margins, Apple sits on about $71 billion of cash and short-term investments. I figure it could make three big mistakes in a row, and still be a healthy company.
Advanced Energy Industries (AEIS), from Fort Collins, Colorado, makes equipment that regulates the flow of electricity. Finely calibrated flows are needed in high-tech manufacturing–the making of semiconductor chips, for example.
The company has shown good growth in recent years, although analysts look for a minor slowdown in profits this year (followed by a recovery in 2019). Its pretax margin last year was 27%. The stock looks like a bargain to me at less than 11 times earnings.
Sporting a 49% pretax margin is United Therapeutics (UTHR). Based in Silver Spring, Maryland, the company develops drugs to treat diseases of the blood vessels, notably pulmonary hypertension.
This is a mid-sized stock ($5.4 billion market cap), a pygmy compared to pharmaceutical giants such as Pfizer ($243 billion market cap) and Merck ($182 billion market cap). These giants have a more diversified product line than United Therapeutics.
That makes United Therapeutics riskier, which is why it trades for only 7 times recent earnings. The stock has quadrupled in a decade, but made no net progress in the past two years.
In the western part of Texas, in the oil-rich Permian Basin, Diamondback Energy (FANG) drills for oil and gas. Shares have sextupled since the Midland, Texas, company went public in 2012. The stock has advanced every year, even when the energy industry got crunched in 2014-2015.
According to Morningstar Analyst David Meats, Diamondback’s total cost to produce a barrel of oil is under $30. That is one of the lowest figures in the energy industry, and is consistent with the 41% pretax margin the company scored in 2017.
If oil stays in the $60 to $75 range, where it is now, Diamondback should continue to show handsome profits.
This is the ninth column in a series. My previous eight columns on stocks with fat and widening profit margins have generated an average one-year return of 21.7%, compared to 16.2% for the Standard & Poor’s 500 over the same eight periods.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
The favorable result I just cited stemmed mainly from big returns in 2009 and 2014. In fact, those were the only two years in which my picks beat the S&P 500. My selections have been profitable seven years out of eight, but several of the profits were mild.
Last year’s return was 15.6%, certainly respectable but still below the S&P’s return of 20.3%. Chase (CCF) and Amerisafe (AMSF) beat the index, but Johnson & Johnson (JNJ) and Getty Realty (GTY) posted lukewarm returns, while Applied Materials (AMAT) was down 2.1%.
Disclosure: I own Apple shares personally and for most of my clients. I own Johnson & Johnson for some clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.