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Increasing Sales and Increasing Profit Margins

This week, Kevin Matras looks at sales growth and increasing profit margins—a powerful combination for big returns. Learn more, and get 3 new stock picks.

This week, I want to focus on sales growth and profit margins.

Being in the thick of earnings season, we’ve probably heard a lot about sales and margins lately. While everybody understands sales, margins might bring up a few questions. So, let’s start at the beginning: First and foremost, sales are THE most important thing to a company. Everything else stems from that. Without sales, there really wouldn’t be anything else to analyze, and sales growth numbers show you how that company is growing.

However, just because sales are increasing doesn’t necessarily mean that profits are too. It is important to remember that sales at the expense of profits do not work. So, paying attention to profit margins is the next thing we’re going to want to do.

Margin is simply a ratio, and the calculation is: net income divided by sales.So, if a company’s margin is 15 percent, for instance, that means the company’s net income is 15 cents for every $1 dollar of sales it makes. But if a company’s expenses are growing faster than their sales, this will reduce their margins. In general, a company with increasing margins is becoming more profitable and is better managed, i.e., their costs are under control.

The Parameters:

  • 12-month trailing sales growth (current / 1 quarter ago) >= their relevant industry average. (Looking for the top companies in their industries.)
  • Current net margin >= five-year average net margin. (Steady to increasing net profits is what we’re after.)
  • "Zacks Rank" = 1 (The Zacks Rank is one of the best—if not the best—rating system out there. One of the main components to the Zacks Rank is earnings estimate revisions. The whole idea being that companies that receive upward estimate revisions have a tendency to receive even more of them, and this helps paint a solid picture moving forward.)

Here are three stocks that pass the screen this week:

CSGP CoStar Group, Inc.
MIND Mitchum Industries, Inc.
SNDA Shanda Interactive Entertainment, Inc.

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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.

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