If a company has a fat profit margin, it's a good sign for two reasons. Customers want its goods or services enough to pay a hefty price. And the company is not letting expenses balloon.
On the basis of their high profit margins, I recommend ON Semiconductor Corp. (NASDAQ:ON), Martin Marietta Materials Inc. (NYSE:NYSE:MLM), Devon Energy Corp. (NYSE:NYSE:DVN), T. Rowe Price Group Inc. and Snap-on Inc. (NYSE:SNA).
This is the 15th column I've written about companies with pleasingly plump profit margins. In 14 past years, my selections in this series have achieved an average one-year return of 17.50%. That beats the average for the Standard & Poor's 500 Total Return Index, which was 15.80% over the same period.
Bear in mind that my column results are hypothetical and shouldn't be confused with results I obtain for clients. Also, past performance doesn't predict the future.
Now, here are five new high-margin selections.
ON SemiconductorSpecializing in semiconductor chips for cars, ON Semiconductor (NASDAQ:ON) boasts a 10-year revenue growth rate of more than 11%, and an earnings growth rate of more than 27%. It hit a bump last year, though, with both revenue and profits falling slightly.
Was that just a bump, or a wall that the company hit? Analysts are divided on that question. Of 33 analysts covering the company, 19 call it a buy and 14 rate it a hold or underperform.
I believe that the cars of the future will need even more chips than the cars of the present. And I like ON's net profit margin of nearly 25%. So I'm guessing that the recent slowdown was merely a bump.
Martin MariettaThere were two companies named Martin Marietta (NYSE:MLM). One merged with Lockheed Corp. to form Lockheed Martin Corp. (NYSE:NYSE:LMT), the largest U.S. defense contractor by revenue. The other, Martin Marietta Materials, is the one I'm recommending today.
The materials company, based in Raleigh, North Carolina, provides crushed stone, gravel, sand and cement. That may sound prosaic but the stock has doubled in the past five years and the company's after-tax margin is nearly 31%.
The recent increase in federal infrastructure spending has helped this company, and I expect the favorable effects will continue for the next few years.
Devon EnergyEnergy companies are said to be more oily or gassy depending on the mix of oil and gas they produce. Devon, based in Oklahoma City, Oklahoma, is relatively gassy. In the most recent quarter, its production included 29% natural gas and 28% natural-gas liquids.
Devon appears to be putting together a fourth consecutive very profitable year, after posting losses in six of the nine years preceding. I find the stock, at 8 times earnings, quite attractive. The net margin lately has been above 22%.
T. Rowe PriceAn investment firm specializing in mutual funds and employee-benefit plans, T. Rowe Price (NASDAQ:TROW) of Baltimore, Maryland, boasts a net margin of more than 28%. In the past five years, the stock has been a dud, sitting today slightly below where it was five years ago.
I think that financial stocks will benefit if the Federal Reserve eases interest rates over the next couple of years. Selling at less than 13 times earnings, the stock looks to me like a good bet.
Snap-onBased in Kenosha, Wisconsin, Snap-on Inc. (NYSE:SNA) provides repair tools and software to auto shops. It works on a franchise system. Franchisees by a red-and-white truck from Snap-on, along with gear to fill it. Then they distribute it to gas stations and other auto-repair shops.
The franchisees make about $60,000 to $130,000 a year, according to third-party reports. Snap-on itself made a little over $1 billion in the past four quarters, on revenue of roughly $5 billion.
Some people figure that the advent of electric cars will hurt the company, since electric cars have fewer parts than gasoline-powered cars. My view is that car repairers will need both kinds of tools for the next five years or more.
Last yearMy fat-margin stocks enjoyed a bigger lead over the S&P 500 before the past year. My picks in 2023 were a disaster.
They fell 7.50%, even as the S&P 500 rose 26.90% with dividends reinvested. None of my picks did especially well. The worst performers were Livent Corp. (now part of Arcadium Lithium PLC (NYSE:ALTM)) and Utah Medical Products Inc. (NASDAQ:UTMD), both down close to 24%.
The crummy performance was all the more disappointing because it followed a very good one in 2022, when my fat-margin selections returned 32.94%.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.