During the past five years, engineers at
have managed to upend the consumer electronics industry, delivering
a full suite of products that have now found a home in living rooms
and on office desks around the world. The rest of the industry can
only sit by and watch as Apple moves even further ahead of the
pack, setting the stage for robust sales in 2013 and beyond.
Yet Apple's product development machine may not be this
company's most impressive aspect. Instead, it's the company's
fiscal management of operations, as a highvolume of sales is
generated on a relatively low level ofoverhead . With each passing
year, Apple's operating andnet profit margins keep rising
Apple's Impressive Margin Gains
*fiscal year ends September
Few companies in the United States -- or the world -- can boast
of 35% operating margins and 25% net profit margins. These two
impressive numbers set me thinking. Is Apple the most profitable
company in the United States boasting these metrics?
I scanned the S&P 500 and a mid-capindex , the S&P 400,
and managed to find 27 companies even more impressive than
The check collectors
It may not always be a fair fight. A few of these companies exist
mainly to collect royalty checks and have almost no overhead. So if
you're just waiting for checks to arrive in the mail, then it's
easy to look quite profitable. These firms own profitable patents
or interest in mines, and include:
, which licenses a range of patents used in wireless telecom
Royal Gold (Nasdaq:
, which takes ownership stakes in other firms' gold mines.
Companies that run the world's topmarket exchanges and financial
transactions services networks also sport great margins. After all,
most stock trading andcredit card processing are electronically
automated, so they require very little human oversight to function
smoothly. These firms include:
CME Group (NYSE:
, which runs a range of options,futures andderivatives
InterContinental Exchange (NYSE:
, which is similar to CME.
, the nation's largest credit card processor.
, Visa's next of kin.
Drilling for oil and gas can be quite lucrative as well. Firms
in the energy sector with even more impressive margins than Apple
Atwood Oceanics (NYSE:
Cimarex Energy (NYSE:
Diamond Offshore Drilling (NYSE:
Northern Oil & Gas (NYSE:
Occidental Petroleum (NYSE:
You'll also find a handful ofreal estate investment trusts
(REITs) that are even more profitable than Apple, as they also
carry very little overhead for the sales they can generate. These
National Retail Properties (NYSE:
Public Storage (NYSE:
Realty Income Corp. (NYSE:
Senior Properties Housing Trust (NYSE:
But what about companies that make money the old-fashioned way?
After all, Apple is tasked with actually building, stocking and
marketing real products -- and that takes money. Remarkably, there
are 11 companies that are also faced with these costs and are still
more profitable than Apple.
It should come as no surprise that biotech firms
Gilead Sciences (Nasdaq:
United Therapeutics (Nasdaq:
are quite profitable. While key drugs are shielded from generic
competition, they can fetch high prices and cost little to make.
What should you expect to happen when these key drugs lose patent
, a pair of industry bellwhethers, had operating and net margins in
the low to mid-teens in 2011.
You'll note other top-quality operators in the table above.
Intuitive Surgical (Nasdaq:
, for example, has become a powerhouse in the field of spinal
surgery, with sales likely to exceed $2 billion this year. But the
company's hefty $21 billionmarket value means this company trades
for around 36 times projected 2012 profits. That's rich.
The key is to find these great companies when they are
temporarily out of favor, which is surely the case with chip maker
. The company has recently traded down to two-year lows on subdued
fourth-quarter guidance. But analysts say the company is poised for
renewed strength in 2013 as advanced wireless networks, known as
LTE, are more deeply deployed inemerging markets such as China and
India. Altera is a leading provider of specialized chips, known as
programmable logic devices (PLDs), which are used in many LTE
How efficient has Altera become thanks to its low-cost,
high-marginbusiness model ? Consider that the cumulative $1.6
billion infree cash flow generated during the past two years is as
much as the free cash flow generated in the prior five years --
combined. Nearly one-third of Altera's market value is represented
by the company's $3.1 billion net cash balance, and when you
exclude the cash, Altera's free cash flow compares quite favorably
to the company'senterprise value . This translates into a free cash
flowyield in excess of 10% in each of the past two years. This kind
of reasonable valuation is hard to find in companies with
Risks to Consider:
Many of these companies have been able to boost margins
throughout the current cycle, though an economic slowdown would
likely lead to a bit of negativemargin leverage .
Action to Take -->
Apple -- and its high-margin peers -- have established very
impressive track records. Leading-edge products that carry firm
pricing -- coupled with a very tight lid on overhead -- are the
secrets to their success. If you're looking to invest in stocks as
successful as Apple, then the ones I've mentioned here are a good
place to start your research. For the best upside potential, look
for the ones that are temporarily out of favor, as is the case with
-- David Sterman
P.S. -- If you like investing in safe, dependable stocks that
make money year-in and year-out, no matter what the market does,
then you should read our newest report. In it, we detail the
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MA, SNH, GILD in one or more of its "real money"
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