To: IQBAL LATIF (29571 )
From: IQBAL LATIF
Thursday, Nov 4 1999 8:25AM ET
Reply # of 29582
Screening for Highly Profitable Companies
by Dave Sterman, Director of Online Research (11/2/99)
Global giants such as General Electric (NYSE:GE - Quotes, News, Boards) or IBM
(NYSE:IBM - Quotes, News, Boards) generate massive profits every quarter. In
absolute terms, blue chip stocks are the most profitable companies around. But what
about on a relative basis? Are these companies squeezing the most profit out of every
dollar of sales? Not necessarily.
We ran a screen of companies that have consistently generated very strong returns on
their sales. Specifically, we looked for outfits that have posted an average pre-tax profit
margin of 25% over the last five years. (Profit margins is the amount of profit made from
every dollar sales. A company that earns $0.20 before taxes on each dollar of sales has
a pre-tax margin of 20%).
Like this Article?
We wanted to make sure that the trend is our friend, so companies need to bump up
that pre-tax profit mark to 30% over the last four quarters. Just as important, these
selected companies must have posted successive sales growth over the last few years.
In addition, each company should be on track to boost profits yet further this year and
next. Lastly, we weeded out the small fry, demanding that each entrant have a market
capitalization of at least $400 million.
It should come as no surprise that Intel (NASDAQ:INTC - Quotes, News, Boards)
and Microsoft (NASDAQ:MSFT - Quotes, News, Boards) made the cut. These tech
giants have spun off massive amounts of cash as they have dominated their niches. In
addition, unlike other technology vendors, these two firms do not need to deploy a
massive sales force to peddle their products.
Not surprisingly, several biotech outfits made the cut. While a new drug or treatment is
still under patent protection, it is often quite expensive. But the drug manufacturing
process is not overly burdensome, especially when sales climb and manufacturing
efficiencies are achieved.
That sums up the track record for Theragenics (NYSE:TGX - Quotes, News, Boards),
which makes radioactive implantable seeds that treat prostate cancer. After several
years of torrid growth, pre-tax profit margins have stabilized at a very respectable 54%.
Through a marketing arrangement with Johnson & Johnson (NYSE:JNJ - Quotes,
News, Boards), the company is shipping ever larger quantities of its tiny pellets. Sales of
$11.5 million in its third quarter were a record for the company, and Paine Webber?s
Charles Olsziewski sees them rising to record levels over the next five quarters as well.
Shares of Theragenics have come down sharply from their all-time high, as many have
questioned whether the company?s super hot growth was sustainable. Admittedly, the
company is no longer positioned to double sales and profits, but 30% growth looks
quite sustainable. Shares recently traded hands for around 15 times consensus earnings
estimates for 2000.
A more diverse bet on high-margin biotech stocks is Jones Pharma (NASDAQ:JMED -
Quotes, News, Boards), which buys the rights to small, underpromoted drugs that it can
peddle through its sales force. That strategy has paid off in spades, as the company?s
pre-tax profit margin has accelerated each year to a recent 56.8%. That?s a big
number! The strong pre-tax margins stem from 80+% gross profit margins.
And recently acquired drugs should help keep the numbers aloft. The company is also
expected to spend its $162 million cash balance to acquire yet more drugs. Hambrecht
& Quist?s Alex Zisson thinks that if the company spent half of that cash on new drugs,
his current 2000 earnings estimate of $1.20 a share would rise to $1.50 a share. At a
recent $31.50, the shares look very attractive in light of the expanding drug pipeline.
The semiconductor industry also has its shares of high-profit players. That?s because a
company charge a significant premium if it delivers State of the Art solutions to high tech
customers. Our two favorites in the group: Altera (NASDAQ:ALTR - Quotes, News,
Boards) and Xilinx (NASDAQ:XLNX - Quotes, News, Boards). Both companies
make specialty chips, known as Programmable Logic Devices (PLD).
In addition to continually rolling out new chips that command prices, both companies
have forsworn the headaches and costs associated with manufacturing. Each outfit farms
out its orders to contract manufacturers, keeping internal costs fairly low. That has
enabled both Altera and Xilinx to post pre-tax profit margins in excess of 30%.
Ticker Name 5 Yr. Avg.
Pretax
Margin TTM
Pretax
Margin Mean E.P.S.
Next FY
ALSI Advantage Learning 28.26 42.01 0.82
ALTR Altera Corp. 31.58 39.15 1.42
AMGN Amgen, Inc. 40.11 45.53 2.22
CTXS Citrix Systems 31.32 57.28 1.65
DCR Duff & Phelps Cr. Rating 29.86 35.34 4.55
GNTX Gentex Corporation 27.59 36.31 1.01
INTC Intel Corporation 36.28 39.01 2.67
JMED JONES PHARMA, Inc. 31.94 56.77 1.20
LLTC Linear Technology 53.74 56.39 1.87
MXIM Maxim Integrated Products 42.81 48.96 1.96
MRX Medicis Pharmaceutical 26.38 56.17 1.60
MSFT Microsoft Corporation 45.37 60.22 1.83
SAWS Sawtek, Inc. 26.56 45.59 0.86
CKH Seacor Smit 28.86 30.07 2.86
TLAB Tellabs, Inc. 26.87 33.41 1.65
TGX Theragenics Corp. 44.77 54.29 0.73
USM U.S. Cellular 25.03 37.74 1.99 |
