The Department of Commerce released its latest monthly report on durable goods yesterday, noting a 3.6%, or $8 billion, increase in new orders for manufactured durable goods in May. Durable goods refers to goods that last for three or more years such as appliances, cars, and computers. The new orders portion of the Department of Commerce’s report is a leading economic indicator used to assess manufacturing activity and business demand. May’s increase marks the third straight month of new order growth, and, per USA Today, is the first time new orders of durable goods have increased for three consecutive months since fall 2011.
Given the positive news regarding orders for durable goods, we decided to look for stocks with encouraging profitability and inventory trends. Many industries manufacture durable goods, so we decided to focus specifically on computers, electronics, and machinery for this screen. To begin, we constructed a universe comprised of stocks from the following industries: computer peripherals, computers wholesale, diversified computer systems, diversified electronics, diversified machinery, electronic equipment, electronics wholesale, farm and construction machinery, machine tools and accessories, personal computers, and semiconductors.
Next, we used the DuPont equation to analyze the profitability of these companies. The DuPont equation takes into account the firm’s Return on Equity (ROE). ROE is essentially a company’s net profits divided by its average equity. In general, the higher the ROE, the more profitable the company is.
Dupont stretches that equation into 3 parts:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
This enables us to examine the strength of a company’s major sources of profitability. Generally, an increase in net profits or asset efficiency is viewed as a positive source of growth, while an increase in leverage ratio (debt) is viewed as a negative. So for our purposes, we screened for companies with an increasing Net Profit margin and Asset turnover, and a decreasing Leverage ratio.
We then looked for companies demonstrating faster growth in revenue than inventory over the last year. Inventory is the portion of goods that a company has yet to sell, so revenue growth that outpaces inventory growth is indicative of healthy turnover and a strong ability to sell products.
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Do you think the profitability and inventory trends of these stocks are a winning combination? Use this list as a starting point for your own analysis.
1. Universal Electronics Inc. (UEIC, Earnings, Analysts, Financials): With its subsidiaries develops pre-programmed wireless control products and audio-video accessories that enhance home entertainment systems.
Market cap at $404.8M, most recent closing price at $28.01.
MRQ net profit margin at 2.57% vs. 1.57% y/y. MRQ sales/assets at 0.313 vs. 0.297 y/y. MRQ assets/equity at 1.447 vs. 1.486 y/y.
Revenue grew by 10.59% during the most recent quarter ($114.72M vs. $103.73M y/y). Inventory grew by 5.23% during the same time period ($89.58M vs. $85.13M y/y). Inventory, as a percentage of current assets, decreased from 43.96% to 41.42% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
2. Alamo Group, Inc. (ALG, Earnings, Analysts, Financials): Provides equipment and related replacement parts for maintenance and agriculture.
Market cap at $471M, most recent closing price at $40.01.
MRQ net profit margin at 4.39% vs. 4.36% y/y. MRQ sales/assets at 0.371 vs. 0.346 y/y. MRQ assets/equity at 1.371 vs. 1.571 y/y.
Revenue grew by 1.62% during the most recent quarter ($158.43M vs. $155.91M y/y). Inventory grew by -7.63% during the same time period ($118.22M vs. $127.99M y/y). Inventory, as a percentage of current assets, decreased from 37.04% to 35.76% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
3. Emerson Electric Co. (EMR, Earnings, Analysts, Financials): Operates as a diversified manufacturing and technology company.
Market cap at $39.51B, most recent closing price at $54.83.
MRQ net profit margin at 9.41% vs. 9.21% y/y. MRQ sales/assets at 0.251 vs. 0.245 y/y. MRQ assets/equity at 2.253 vs. 2.296 y/y.
Revenue grew by 0.69% during the most recent quarter ($5,960M vs. $5,919M y/y). Inventory grew by -3.12% during the same time period ($2,327M vs. $2,402M y/y). Inventory, as a percentage of current assets, decreased from 25.17% to 22.84% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
(List compiled by Mary-Lynn Cesar. Accounting data sourced from Google Finance. All other data sourced from Finviz.)
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Dig Deeper: Access Company Snapshots, Charts, FilingsUniversal Electronics Inc. (UEIC, Chart, Download SEC Filings) Alama Group, Inc. (ALG, Chart, Download SEC Filings) Emerson Electric Co. (EMR, Chart, Download SEC Filings)
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