Market lessons: 20 companies with fat profit margins

Some call it greed, some call it “earnings quality.” Net margins can go to extremes.

_{Written by Hyunsoo Rim AND Segun Olakoyenikan; Edited by William Baldwin}

Ddefinition: net income divided by revenue. Why should investors care about it? Because it gives some indication of a corporation’s ability to withstand adversity. High margin companies tend to have low fixed costs and strong balance sheets. Their businesses hold up well during recessions.

FactSet tells us that the average margin for members of the S&P 500 index is 11.6%. The table highlights some differences: first, companies with paper-thin margins, some chronically low, some temporarily. Then, the big-margin companies like Visa, Nvidia and Microsoft.

You often see the stocks of those three winners in the portfolios of funds that track the so-called quality factor. “Quality” is not a precise term, but it generally reflects pricing power, a high return on assets, and sustainable prosperity. Lovers of quality aren’t likely to fall in love with commodity manufacturers like Cleveland-Cliffs and International Paper, or suppliers in an industry known for price wars, like American Airlines, or old-fashioned retailers like Macy’s.

Some of the huge profit margins are destined to shrink. Airbnb is getting a temporary boost from a negative tax bill, the result of a carryover of losses from its years trying to grow and weather the pandemic. Altria has a lot of pricing power—given the ban on advertising, it’s hard for a new cigarette label to break through—but no way to stop the erosion of its customer base. The outcome of Hut 8 is as unpredictable as bitcoin.

On the other side of the margin saw are some companies that could see a rebound. Disney used to have a margin five times higher; perhaps it could go beyond the current oversupply of movies and sports programming. Dana has had some non-repeat losses that will likely not be repeated.

Profitability attracts as much attention from politicians as it does from investors. “According to a recent study, nearly 54% of the increase in inflation is directly attributable to the astronomical increase in corporate profit margins,” said Vermont Senator Bernie Sanders. “Profits at America’s largest companies topped $3 trillion this year,” Ohio Senator Sherrod Brown said recently, “and margins continue to rise.”

The lawmakers are right that the margins are fattening. A series of data from St. The Federal Reserve Bank of Louis shows corporate profits, as a percentage of value added, rising over the past half century from 2.2% to 15.6%.

On the other hand, popular anger about corporate greed is misdirected. Common targets of consumer ire, such as airlines, car dealers and grocery stores, typically don’t enjoy fat margins. The next lesson about greed should probably be addressed to sellers of vacation rentals, software packages, and artificial intelligence chips.

The extreme company tables exclude flow entities (such as REITs) and money losers.

NET CASH MARGIN

LUCKY NET MARGIN