Markets

5 Top Stocks with Solid Net Profit Margin

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The primary purpose of a business is to generate profits that can be reinvested for expansion or utilized to reward shareholders. Net profit margin is an effective tool for the measurement of profit generated by a business.

Net Profit Margin = Net profit / Sales * 100.

Net profit of a business is the amount that remains in the last line (also known as bottom line) of the income statement after all costs (including taxes) have been deducted from revenues.

In fact, net profit margin can turn out to be a potent point of reference to gauge the strength in a company's operations and cost-control measures.

Net margin helps investors assess the risks of investing in a company. Creditors also view it as a major factor in determining a company's ability to pay off debts.

Moreover, the strength in the metric not only attracts investors but also draws well-skilled employees who eventually add to the value of the business.

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 crucial for technology companies.

Moreover, the difference in accounting treatment of various items - especially non-cash expenses like depreciation and stock-based compensation - makes comparison a daunting task.

Further, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective for the analysis of 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 other 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 prospects of the stock.

Zacks Rank equal to 1 : In good markets or bad, stocks with a Zacks Rank #1 (Strong Buy) continue to outperform. 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 (Buy) offer the best upside potential.

Here are five of the nine stocks that qualified the screen:

Gibraltar Industries Inc.ROCK manufactures and distributes products to the industrial and buildings market. The company has its headquarters at Buffalo, NY. Gibraltar outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 67.30%. The stock has a VGM score of 'A'. Meanwhile, the Zacks Consensus Estimate for 2017 earnings remained steady at $1.85 per share over the last 30 days.

Gibraltar's one-year return of 110.7% is way better than the Zacks Building & Construction Products- Miscellaneous industry's gain of 53.5%.

Hounslow United Kingdom-based International Consolidated Airlines Group S.A.ICAGY is a holding company for British Airways and Iberia. The stock has a VGM score of 'A'. Meanwhile, the Zacks Consensus Estimate for 2017 earnings remained steady at $1.67 per share over the last 30 days.

International Consolidated Airlines' year-to-date return of 12.3% is higher than the Zacks Transportation-Airline industry's addition of 2.3%.

New York-based Leucadia National CorporationLUK is a diversified holding company with interest in financial services, beef processing, oil and gas exploration and development and automobile dealerships. The stock has a VGM score of 'B'. Meanwhile, the Zacks Consensus Estimate for 2017 earnings remained fixed at $1.38 per share over the last 30 days.

Leucadia's one-year return of 57.5% is better than the Zacks Diversified Operations industry's gain of 13.2%.

Tampa, FL-based Masonite International CorporationDOOR is a designer and manufacturer of interior and exterior doors. The stock has a VGM score of 'B'. Last quarter, the company beat the Zacks Consensus Estimate by 19 cents (27.14%). Moreover, 2017 earnings estimates increased by 3 cents to $3.59 per share over the last 30 days.

Notably, Masonite's one-year return of 40.7% is better than the Zacks Furniture industry's gain of 23.8%.

Racine, WI-based Modine Manufacturing CompanyMOD manufactures and sells heat transfer equipment including heat exchangers for cooling all types of engines, transmissions, auxiliary hydraulic equipment, air conditioning components and construction machinery and equipment, and heating and cooling equipment for residential and commercial building HVAC. The stock has a VGM score of 'B'. Meanwhile, the Zacks Consensus Estimate for 2017 remained stable at 84 cents over the last 30 days.

Modine's one-year gain of 63.8% compares favorably with the Zacks Auto/Truck Original Equipment industry's addition of 45.1%.

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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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International Consolidated Airlines Group SA (ICAGY): Free Stock Analysis Report

Modine Manufacturing Company (MOD): Free Stock Analysis Report

Leucadia National Corporation (LUK): Free Stock Analysis Report

Masonite International Corporation (DOOR): Free Stock Analysis Report

Gibraltar Industries, Inc. (ROCK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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