4 Stocks from the Most Profitable Sector - Investment Ideas
April 10 2011 - 8:00PM
Zacks
Margin expansion has been a huge source of earnings growth as
companies emerged from the recession lean and mean.
Revenue growth in the S&P 500 rose a solid 9.7%
in 2010 (excluding financials). However, the real driver of income
growth came from expanding profit margins.
Lean & Mean
Net profit margins increased from 7.1% in 2009 to
8.2% in 2010 as companies that slashed costs during the recession
squeezed the most they could out of their resources.
This led to a whopping 27.4% increase in net
income for the S&P - and a soaring stock market.
Net profit margins, calculated as net income
divided by revenues, are expected to continue expanding, leading to
more double-digit earnings growth in 2011. The net profit margin is
expected to increase to 8.8% for the S&P 500. Combine that with
projected revenue growth of 6.6%, and you get net income growth of
14.4%.
Not too shabby.
The Most Profitable Sector
So what sector is expected to see the widest net
profit margins in 2011?
Computer and Technology.
The computer and technology sector is expected to
see an incredible 16.3% net profit margin in 2011, up from 15.3% in
2010. That means for every $1 in revenue, companies keep an average
of 16.3 cents after-tax. That's nearly twice the average of the
S&P 500.
Moreover, revenues are expected to grow 10.7% in
the sector, leading to net income growth of 18.3% in 2011.
Valuation is very reasonable too, with the sector
sporting an average P/E of 15.0x 2011 earnings. That's a slight
premium to the S&P multiple of 13.9x, but still well below its
historical average.
Here are 4 computer and technology stocks
looking attractive right now:
Check Point Software Technologies Ltd.
(CHKP) provides IT security solutions around the globe. It is best
known for its firewall and virtual private network (VPN)
products.
The company is wildly profitable, posting a
remarkable 41.2% net profit margin in 2010. Earnings are expected
to grow a solid 12% in 2011 based on the Zacks Consensus
Estimate.
Check Point also has a pristine balance sheet with
over $1 billion in cash and no debt. Shares trade at 19.8x forward
earnings, a discount to the industry average of 25.9x.
It is a Zacks #2 Rank (Buy) stock.
Oracle Corp (ORCL) continues to outperform
expectations. The tech giant recently posted its fourth consecutive
positive earnings surprise on 35% growth in revenues.
Estimates have been rising off the strong quarter,
sending the stock to a Zacks #2 Rank (Buy). The company is expected
to grow EPS a whopping 32% in 2011. Despite this, shares are
trading at just 15.9x forward earnings.
Oracle has a 22.4% net profit margin over the last
12 months. It has also generated an average of $8.6 billion in free
cash flow per quarter since the beginning of 2010. It
currently pays a dividend that yields 0.6%.
Waters Corporation (WAT) operates as an
analytical instrument manufacturer for pharmaceutical, biochemical,
and industrial companies. It designs and manufactures high
performance liquid chromatography, ultra performance liquid
chromatography, and mass spectrometry instrument systems and
support products.
The company's net profit margin was an impressive
23.2% in 2010. Furthermore, EPS is expected to grow 14% in 2011
based on the Zacks Consensus Estimate.
Valuation is reasonable with shares trading at
18.9x forward earnings and a PEG ratio of 1.3.
WAT is a Zacks #2 Rank (Buy) stock.
Netease.com Inc. (NTES) is one of the
leading Internet and online gaming companies in China.
Estimates have been surging since NTES posted a 19%
positive earnings surprise on February 23. The company also
reported a fat net profit margin of 40.4% for 2010.
Analysts are calling for 23.9% EPS growth in 2011
based on the Zacks Consensus Estimate. It is a Zacks #1 Rank
(Strong Buy) stock.
Valuation is reasonable with shares sporting a PEG
ratio of 1.0. The stock is trading at 16.4x forward earnings, a
discount to the industry average of 25.9x.
NTES is also financially sound with nearly $9.5
billion in cash and short term investments and no long-term
debt.
Conclusion
As the U.S. emerged out of recession, companies
were able to turn decent sales growth into huge earnings growth
through expanding profit margins. These gains are expected to
continue in 2011, particularly in the wide-margin computer and
technology sector. With strong earnings growth expected and
reasonable valuations, tech stocks are looking like an attractive
investment.
Todd Bunton is the Growth & Income Stock
Strategist for Zacks.com.
CHECK PT SOFTW (CHKP): Free Stock Analysis Report
NETEASE.COM-ADR (NTES): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
WATERS CORP (WAT): Free Stock Analysis Report
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