A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.
One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.
ROE can be broken up into three components such that increases in ROE can be attributed to those components.
ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,
• Decreasing leverage, i.e. decreasing Asset/Equity ratio
• Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
To illustrate this analysis, we ran DuPont on stocks of the S&P 500 that appear undervalued to earnings growth, with PEG below 1.
?Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.?
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We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
Do you think these companies are performing well? Use this list as a starting-off point for your own analysis.
List sorted by change in ROE.
1. Alcoa, Inc. (AA): Engages in the production and management of aluminum, fabricated aluminum, and alumina. Market cap of $11.12B. PEG at 0.17. MRQ Net Profit Margin increased to 4.89% from 2.62% year-over-year, Sales/Assets increased to 0.16 from 0.14, while Assets/Equity decreased to 2.65 from 2.96. This is a risky stock that is significantly more volatile than the overall market (beta = 2.12). The stock is currently stuck in a downtrend, trading 10.8% below its SMA20, 18.04% below its SMA50, and 32.07% below its SMA200. It's been a rough couple of days for the stock, losing 9.76% over the last week.
2. Denbury Resources Inc. (DNR): Engages in the acquisition, exploitation, drilling, and extraction of oil and natural gas properties in the Gulf Coast region located in Mississippi, Texas, Louisiana, and Alabama. Market cap of $4.92B. PEG at 0.81. MRQ Net Profit Margin increased to 43.11% from 27.23% year-over-year, Sales/Assets increased to 0.06 from 0.05, while Assets/Equity decreased to 2.01 from 2.26. The stock is currently stuck in a downtrend, trading 14.76% below its SMA20, 24.11% below its SMA50, and 38.38% below its SMA200. It's been a rough couple of days for the stock, losing 13.39% over the last week.
3. KLA-Tencor Corporation (KLAC): Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Market cap of $6.63B. PEG at 0.90. MRQ Net Profit Margin increased to 27.46% from 20.21% year-over-year, Sales/Assets increased to 0.19 from 0.14, while Assets/Equity decreased to 1.63 from 1.74. The stock has had a good month, gaining 15.11%.
4. Cablevision Systems Corporation (CVC): Operates as a telecommunications, media, and entertainment company. Market cap of $5.02B. PEG at 0.70. MRQ Net Profit Margin increased to 5.20% from 3.93% year-over-year, Sales/Assets increased to 0.24 from 0.20, while Assets/Equity decreased to -1.28 from -1.23. The stock has lost 1.36% over the last year.
5. Jabil Circuit Inc. (JBL): Provides electronic manufacturing services and solutions in the Americas, Europe, and Asia. Market cap of $3.66B. PEG at 0.54. MRQ Net Profit Margin increased to 2.48% from 1.51% year-over-year, Sales/Assets increased to 0.6078 from 0.6070, while Assets/Equity decreased to 3.60 from 3.80. This is a risky stock that is significantly more volatile than the overall market (beta = 2.07). The stock has had a good month, gaining 13.27%.
6. Cummins Inc. (CMI): Designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. Market cap of $17.42B. PEG at 0.81. MRQ Net Profit Margin increased to 10.88% from 7.67% year-over-year, Sales/Assets increased to 0.41 from 0.35, while Assets/Equity decreased to 2.19 from 2.37. It's been a rough couple of days for the stock, losing 7.78% over the last week.
7. Freeport-McMoRan Copper & Gold Inc. (FCX): Engages in the exploration, mining, and production of mineral resources. Market cap of $32.01B. PEG at 0.71. MRQ Net Profit Margin increased to 23.53% from 17.18% year-over-year, Sales/Assets increased to 0.19 from 0.15, while Assets/Equity decreased to 2.11 from 2.47. The stock is currently stuck in a downtrend, trading 19.53% below its SMA20, 26.94% below its SMA50, and 34.14% below its SMA200. It's been a rough couple of days for the stock, losing 16.04% over the last week.
8. Eastman Chemical Co. (EMN): Engages in the manufacture and sale of chemicals, plastics, and fibers in the United States and internationally. Market cap of $4.97B. PEG at 0.98. MRQ Net Profit Margin increased to 11.19% from 9.85% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 3.21 from 3.46. The stock is currently stuck in a downtrend, trading 5.98% below its SMA20, 15.5% below its SMA50, and 22.98% below its SMA200. It's been a rough couple of days for the stock, losing 5.89% over the last week.
9. Hess Corporation (HES): Operates as an integrated energy company. Market cap of $18.38B. PEG at 0.64. MRQ Net Profit Margin increased to 6.19% from 4.84% year-over-year, Sales/Assets increased to 0.27 from 0.26, while Assets/Equity decreased to 1.97 from 2.05. The stock is currently stuck in a downtrend, trading 6.99% below its SMA20, 11.75% below its SMA50, and 27.03% below its SMA200. It's been a rough couple of days for the stock, losing 10.98% over the last week.
10. Halliburton Company (HAL): Provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas worldwide. Market cap of $31.03B. PEG at 0.49. MRQ Net Profit Margin increased to 12.45% from 10.94% year-over-year, Sales/Assets increased to 0.30 from 0.25, while Assets/Equity decreased to 1.71 from 1.88. The stock is currently stuck in a downtrend, trading 15.13% below its SMA20, 25.15% below its SMA50, and 25.96% below its SMA200. It's been a rough couple of days for the stock, losing 11.81% over the last week.
11. Staples, Inc. (SPLS): Operates as an office products company. Market cap of $9.53B. PEG at 0.73. MRQ Net Profit Margin increased to 3.03% from 2.34% year-over-year, Sales/Assets increased to 0.43 from 0.42, while Assets/Equity decreased to 1.92 from 2.05. It's been a rough couple of days for the stock, losing 6.6% over the last week.
12. Torchmark Corp. (TMK): Provides individual life and supplemental health insurance products, and annuities to middle income households. Market cap of $3.70B. PEG at 0.86. MRQ Net Profit Margin increased to 16.98% from 15.08% year-over-year, Sales/Assets increased to 0.0541 from 0.0493, while Assets/Equity decreased to 4.29 from 4.30. The stock has lost 0.17% over the last year.
13. Dover Corp. (DOV): Manufactures and sells industrial products and components, and consumables. Market cap of $9.01B. PEG at 0.84. MRQ Net Profit Margin increased to 11.58% from 9.51% year-over-year, Sales/Assets increased to 0.23 from 0.22, while Assets/Equity decreased to 1.93 from 1.98. The stock is currently stuck in a downtrend, trading 7.97% below its SMA20, 13.16% below its SMA50, and 20.72% below its SMA200. It's been a rough couple of days for the stock, losing 6.56% over the last week.
14. FedEx Corporation (FDX): Provides transportation, e-commerce, and business services in the United States and internationally. Market cap of $22.12B. PEG at 0.93. MRQ Net Profit Margin increased to 5.29% from 4.44% year-over-year, Sales/Assets increased to 0.39 from 0.38, while Assets/Equity decreased to 1.7993 from 1.8031. The stock is currently stuck in a downtrend, trading 6.85% below its SMA20, 12.68% below its SMA50, and 21.68% below its SMA200. It's been a rough couple of days for the stock, losing 7.93% over the last week.
15. Starwood Hotels & Resorts Worldwide Inc. (HOT): Operates as a hotel and leisure company worldwide. Market cap of $7.92B. PEG at 0.86. MRQ Net Profit Margin increased to 9.19% from 8.84% year-over-year, Sales/Assets increased to 0.1426 from 0.1414, while Assets/Equity decreased to 3.57 from 4.71. This is a risky stock that is significantly more volatile than the overall market (beta = 2.02). It's been a rough couple of days for the stock, losing 9.42% over the last week.
16. Eaton Corporation (ETN): Operates as a power management company worldwide. Market cap of $12.23B. PEG at 0.82. MRQ Net Profit Margin increased to 8.22% from 6.69% year-over-year, Sales/Assets increased to 0.23 from 0.21, while Assets/Equity decreased to 2.22 from 2.42. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.79%, current ratio at 1.74, and quick ratio at 1.22. The stock is currently stuck in a downtrend, trading 9.61% below its SMA20, 15.72% below its SMA50, and 26.92% below its SMA200. It's been a rough couple of days for the stock, losing 9.86% over the last week.
17. Janus Capital Group, Inc. (JNS): A publicly owned asset management holding company. Market cap of $1.18B. PEG at 0.84. MRQ Net Profit Margin increased to 15.87% from 12.11% year-over-year, Sales/Assets increased to 0.0989 from 0.0981, while Assets/Equity decreased to 2.15 from 2.42. This is a risky stock that is significantly more volatile than the overall market (beta = 2.66). The stock is currently stuck in a downtrend, trading 5.55% below its SMA20, 12.39% below its SMA50, and 40.14% below its SMA200. The stock has lost 40.75% over the last year.
18. The Interpublic Group of Companies, Inc. (IPG): Provides advertising and marketing services worldwide. Market cap of $3.56B. PEG at 0.90. MRQ Net Profit Margin increased to 6.01% from 5.12% year-over-year, Sales/Assets increased to 0.1415 from 0.1377, while Assets/Equity decreased to 4.99 from 5.39. The stock is currently stuck in a downtrend, trading 5.17% below its SMA20, 16.45% below its SMA50, and 31.6% below its SMA200. The stock has lost 25.43% over the last year.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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