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The stock market has been a volatile beast in 2016, and even that might be a brutal understatement.
We witnessed the worst percentage dip over a two-week period to begin a new year ever, and we’ve followed that up with a pretty voracious rally that’s essentially erased the majority of our rough start. Nonetheless, this increase in volatility has some investors questioning whether or not they want to be part of the investing rollercoaster, or if they’d prefer to be a casual spectator on the sidelines.
Over the last couple of weeks we’ve analyzed a number of ways investors may be able to stay invested by focusing on companies with strong cash flows or high cash balances. Today, we’ll offer up a new set of large-cap companies complete with a new point of focus: net profit margin.
The importance of net profit margin
Just as it sounds, net profit margin is a measure of how profitable a company is. It analyzes how much net profit a company generates after accounting for all costs to run a business, then divides this figure by total revenue. The result is the net profit margin.
Net profit margin can be of particular importance for two primary reasons.
Image source: Pixabay.
First, net profit margin can tell us a lot about the nature of a business. A net profit margin that rises over time could suggest that the management of a company is doing a good job at controlling and/or reducing costs. Conversely, it may also signify an expanding product line and/or improved pricing power, which would allow profits to grow while costs rise at a slower pace or remain static.
The other role net profit margin plays is to give us some insight into the nature of the competition a company faces. High net profit margins often signify that a company may have dominant market share, a dominant product, or that few competitors exist, meaning little in the way of pricing power concerns.
In other words, net profit margin can probably tell you more than you originally thought it could, and it can potentially be a useful tool in spotting top-performing companies.
Three large-caps with the highest net profit margins
With this in mind, let’s have a brief look at three large- and megacap stocks that are currently sporting trailing 12-month net profit margins in excess of 50%.
Gilead Sciences
It may surprise no one to discover that drugmaker Gilead Sciences (GILD -1.18%) offers the highest net profit margin at 55.5% over the trailing 12-month period. Drug developers are clear contenders to have high net profit margins because of their pricing power, but quite a few struggle with high marketing and research and development costs, as well as competition.
Image source: Gilead Sciences.
What’s allowed Gilead Sciences to stand out is its dominance in treating hepatitis C, and to a lesser degree HIV. Gilead’s Sovaldi and Harvoni maintain better than 90% market share in treating HCV patients, and they do so with an arguably high price point of $1,000 per pill and $1,125 per pill, respectively. Over a standard 12-week treatment, Sovaldi and Harvoni could run a patient $84,000 to $94,500 based on its wholesale cost. Although new entrants have emerged, such as Merck’s Zepatier and AbbVie’s Viekira Pak, neither offers the same convenience and quality of care as Harvoni. Gilead appears likely to retain its HCV dominance for years to come.
Likewise, Gilead’s HIV portfolio has only been competing against a select few companies. Right now its toughest competitor is ViiV Healthcare with its duo of Tivicay and Triumeq. However, Gilead’s newest HIV product, Genvoya, which contains a new version of tenofovir that reduces its concentration in the bloodstream and focuses higher concentrations on cells replicated the HIV-1 virus, prices out at more than $31,000 annually.
When it comes to profits, cash flow, and business efficiency, Gilead is a tough cookie to beat. This might make it a company worth considering for your portfolio.
Baidu
China’s search engine giant Baidu (BIDU -2.14%) is another company that pumps out profits and efficiency with a trailing 12-month net profit margin of 50.7%. Like Gilead, dominant market share is what’s helped power its stunningly high margins.
Image source: Pixabay.
Within China, according to China Internet Watch as of Q2 2015, Baidu controlled just shy of 80% of all internet search. By comparison, Google China was sitting at nearly 11%, and Sogou was just above 6%. In other words, Baidu has more than seven times the market share of its next-closest competitor. This makes Baidu the go-to when it comes to advertisers, and it gives the company unparalleled pricing and bargaining power.
If there is one thing shareholders in Baidu may want to keep in mind, it’s the company’s strategy to push heavily into online-to-offline, or O2O, commerce. Baidu is looking to retain its market share moving forward by creating a search and services universe that’ll keep consumers from wandering off to third-party websites. By doing so it can create new channels for revenue generation and keep its existing customers loyal. However, O2O is requiring some hefty investments, and it could wind up being a near-term drag on Baidu’s net profit margin.
Nonetheless, as China’s dominant force in search, Baidu should be able to keep the cash and profits rolling in.
General Growth Properties
Lastly, you might be surprised to find real estate investment trust General Growth Properties (GGP) among the companies with highest net profit margins. Over the trailing 12-month period, General Growth Properties, which is also known as GGP, has tallied a very respectable 54.4% net profit margin.
Image source: Pixabay.
General Growth Properties is one of the largest owners and operators of malls in America. When the economy is firing on all cylinders, GGP can count on retailers to fill in potentially vacant spaces, and the company can easily pass on rental increases to its tenants. In many instances, GGP also benefits from locking its major tenants into long-term contracts that can extend for many years. This helps create some semblance of steady cash flow for the company.
Like most retail REITs, GGP has standard operating costs that reduce net income and net profit margin. Examples would include real estate taxes, property maintenance costs, marketing, general and administrative expenses, depreciation and amortization, and doubtful accounts. However, there are some inconsistent gains that GGP can also book on occasion that appear to really be assisting its net profit margin over the last 12 months. In particular, GGP will, from time to time, dispose of its properties for a profit, which is what it did with a handful of properties in 2015. Doing so helped pump up its net income and boosted its net profit margin over the 50% mark.
Can GGP maintain a profit margin above 50%? More than likely not considering that asset sales aren’t a guarantee from one year to the next. The retail-REIT industry can also be somewhat competitive and dependent on the health of the U.S. economy. While this doesn’t mean GGP isn’t worth investment consideration, it does mean that investors should consider the likelihood that GGP’s current net profit margin is too good to be true.
