By Philip van Doorn, MarketWatch
David Paul Morris/Bloomberg
What are your favored measures for evaluating stocks? I want to see companies constantly increasing sales while becoming more profitable over time.
Those two gauges are more important than tracking quarterly earnings per share — and whether they meet, beat or miss analysts’ expectations.
So I’ve put together a list of large companies that have increased sales significantly while improving gross profit margins.
Investors are constantly being warned not to read too much into companies’ earnings announcements, not only because accounting rules can skew the bottom line in any three-month period, but also because many companies seem to obscure what’s really going on.
Another reason not to focus too much on any quarter is that, in the long run, one earnings report and its attendant hysterical headlines about earnings “beats” or “misses” might not mean anything to a long-term investor. Then again, Wall Street promulgates this harmful obsession with quarterly results with quick-reaction reports and 12-month price targets and ratings. A year is very short for a serious long-term investor.
Since it’s earnings season, I’m going to share different information that incorporates the latest results.
Through Feb. 13, 398 of the companies included in the S&P 500 Index /quotes/zigman/3870025/realtime SPX -0.26% had announced results for quarters ending Oct. 28 or later. So I listed those that have increased sales per share the most and expanded profit margins. But I didn’t confine myself to the most recent quarter. Since I focused on gross margins, the sample excluded 48 companies — mostly banks — that use other measures of profitability.
Here are the 20 S&P 500 companies that have reported the largest increases in sales per share over the past 12 reported months (through Feb. 13) from the previous 12-month period, while also improving gross profit margins:
|Company||Ticker||Sales per share - past 12 months||Sales per share - previous 12-month period||Increase in sales per share||Gross margin - past 12 months||Gross margin - previous 12-month period|
|Vertex Pharmaceuticals Inc.||/quotes/zigman/79675/composite VRTX||$6.94||$4.27||63%||90.34%||87.05%|
|Facebook Inc. Class A||/quotes/zigman/9962609/composite FB||$9.48||$6.27||51%||85.83%||83.25%|
|E-Trade Financial Corp.||/quotes/zigman/118511/composite ETFC||$7.31||$5.21||40%||89.45%||73.79%|
|Activision Blizzard Inc.||/quotes/zigman/110164/composite ATVI||$8.78||$6.33||39%||76.36%||66.02%|
|Qorvo Inc.||/quotes/zigman/44188949/composite QRVO||$23.11||$17.73||30%||38.63%||37.32%|
|Ulta Beauty Inc.||/quotes/zigman/107036/composite ULTA||$71.85||$57.45||25%||36.13%||34.97%|
|Amazon.com Inc.||/quotes/zigman/63011/composite AMZN||$280.96||$224.93||25%||35.09%||33.04%|
|Celgene Corp.||/quotes/zigman/69584/composite CELG||$13.71||$11.03||24%||96.90%||92.23%|
|Adobe Systems Inc.||/quotes/zigman/67665/composite ADBE||$11.60||$9.36||24%||84.63%||82.85%|
|Applied Materials Inc.||/quotes/zigman/19895/composite AMAT||$9.74||$7.88||24%||41.68%||40.90%|
|Nvidia Corp.||/quotes/zigman/80597/composite NVDA||$10.81||$8.77||23%||58.96%||56.13%|
|Fidelity National Information Services Inc.||/quotes/zigman/349218/composite FIS||$28.13||$22.99||22%||42.17%||33.85%|
|Zimmer Biomet Holdings Inc.||/quotes/zigman/287652/composite ZBH||$38.10||$31.30||22%||72.89%||61.87%|
|Acuity Brands Inc.||/quotes/zigman/294255/composite AYI||$77.63||$64.27||21%||43.17%||42.63%|
|Intercontinental Exchange Inc.||/quotes/zigman/23571824/composite ICE||$9.93||$8.23||21%||65.27%||64.45%|
|Edwards Lifesciences Corp.||/quotes/zigman/257334/composite EW||$13.61||$11.32||20%||74.47%||73.27%|
|Red Hat Inc.||/quotes/zigman/208092/composite RHT||$12.66||$10.59||20%||84.62%||84.12%|
|BorgWarner Inc.||/quotes/zigman/131196/composite BWA||$42.18||$35.53||19%||21.33%||21.19%|
|Corning Inc.||/quotes/zigman/223221/composite GLW||$8.45||$7.12||19%||39.49%||39.30%|
|Regeneron Pharmaceuticals Inc.||/quotes/zigman/77392/composite REGN||$42.02||$35.58||18%||91.68%||88.61%|
|Sources: FactSet, company filings|
I focused on sales per share, rather than revenue, because the per-share figures bake in any dilution from the issuance of stock for acquisitions, compensation or other purposes. This means that if a company’s revenue increased dramatically because of an acquisition paid for with stock, the per-share figures are far more meaningful than the raw sales figures. The per-share figures also reflect stock repurchases.
A company’s gross profit margin is its revenue, less the cost of goods sold, divided by revenue. It is a raw measure of product profitability. In contrast, bottom-line profit margins — net margins — can be misleading.
This table includes total returns, forward price-to earnings ratios and PEG ratios for the group:
|Company||Ticker||Total return - 3 years||Total return - 5 years||Price/consensus 2018 EPS estimate||PEG ratio|
|Vertex Pharmaceuticals Inc.||/quotes/zigman/79675/composite VRTX||3%||143%||29.4||0.5|
|Facebook Inc. Class A||/quotes/zigman/9962609/composite FB||99%||N/A||19.9||0.8|
|E-Trade Financial Corp.||/quotes/zigman/118511/composite ETFC||66%||288%||15.2||0.9|
|Activision Blizzard Inc.||/quotes/zigman/110164/composite ATVI||138%||294%||19.3||0.9|
|Qorvo Inc.||/quotes/zigman/44188949/composite QRVO||181%||225%||9.9||0.7|
|Ulta Beauty Inc.||/quotes/zigman/107036/composite ULTA||212%||230%||27.6||1.4|
|Amazon.com Inc.||/quotes/zigman/63011/composite AMZN||134%||337%||67.0||1.6|
|Celgene Corp.||/quotes/zigman/69584/composite CELG||41%||218%||13.3||0.7|
|Adobe Systems Inc.||/quotes/zigman/67665/composite ADBE||75%||264%||24.4||1.3|
|Applied Materials Inc.||/quotes/zigman/19895/composite AMAT||99%||207%||13.7||1.0|
|Nvidia Corp.||/quotes/zigman/80597/composite NVDA||552%||621%||32.5||3.5|
|Fidelity National Information Services Inc.||/quotes/zigman/349218/composite FIS||57%||206%||16.8||1.5|
|Zimmer Biomet Holdings Inc.||/quotes/zigman/287652/composite ZBH||26%||101%||12.5||1.4|
|Acuity Brands Inc.||/quotes/zigman/294255/composite AYI||63%||261%||30.3||0.8|
|Intercontinental Exchange Inc.||/quotes/zigman/23571824/composite ICE||41%||130%||17.3||1.3|
|Edwards Lifesciences Corp.||/quotes/zigman/257334/composite EW||168%||143%||23.4||1.4|
|Red Hat Inc.||/quotes/zigman/208092/composite RHT||37%||63%||26.6||1.6|
|BorgWarner Inc.||/quotes/zigman/131196/composite BWA||-24%||10%||11.2||1.7|
|Corning Inc.||/quotes/zigman/223221/composite GLW||50%||121%||14.9||3.0|
|Regeneron Pharmaceuticals Inc.||/quotes/zigman/77392/composite REGN||15%||228%||23.2||1.2|
In comparison, the S&P 500 trades for 15.9 times aggregate consensus 2018 EPS estimates. The index has returned 36% over the past three years and 92% over five years.
The PEG ratio is price-to-earnings-to-expected-EPS growth, based on consensus 2018 estimates among analysts.
You can see that most of the companies have outperformed over the past three and five years, and you might find the valuations attractive for several of them. If you are interested in any of the stocks, your next step is to do your own research and consider how likely a company is to continue making a success of its business strategy for many years to come.