Firms That Mind Their Margins

The goal of any company is to make money, and one of the most intuitive ways to get a handle on profitability is by looking at margins, or the company's profits after expenses expressed as a percentage of revenues.

But the market downturn put a dent in margins for many big-name companies. Even software stalwart  Microsoft (MSFT) has seen margin compression in recent years, with net margins slipping from 39% in fiscal 1999 to 31% in 2003. For the average company in the S&P 500 Index, net margins have dipped from about 8.3% five years ago to 5.1% for the most recent year.

For this week's Five-Star Investor, we used Morningstar's  Premium Stock Screener to identify companies that have bucked the trend by consistently boosting their margins. (Premium Stock Screener is included in Morningstar.com Premium Membership. If you're not a Premium Member, click here to sign up for a free trial.) We simply screened for companies that have shown increases in net margins in each of the past five years.

Because improving profitability is obviously a desirable trait, some of the stocks that made the cut aren't exactly cheap. For example,  P.F. Chang's China Bistro  and doughnut seller  Krispy Kreme Doughnut  have consistently boosted their margins, but the stocks are trading at P/Es of 62 and 57, respectively. On the whole, though, the companies that made the cut don't trade at a premium to the market. That means that while overall market valuations are relatively steep, it's still possible to find stocks with improving fundamentals that aren't necessarily overpriced. 

Here are some of the highlights:

 Anheuser-Busch Companies (BUD)
Economic Moat: Wide
Business Risk: Below Average
Morningstar Rating: 4 Stars
From the  Analyst Report: "As the 800-pound gorilla of the U.S. beer industry surrounded by a few orangutans, Anheuser-Busch remains one of our favorite beverage stocks. We wouldn't require more than a 20% discount to our fair value estimate to consider the shares a bargain."

 BlackRock (BLK)
Economic Moat: Wide
Business Risk: Below Average
Morningstar Rating: 4 Stars
From the  Analyst Report: "We think BlackRock's growth plans, combined with its proven fixed-income business, are a smart move. The company is targeting focused, high-value areas for expansion and it should be able to leverage its strong brand with its institutional clients. We expect a double-digit increase in assets under management in 2003, adding to BlackRock's record of steady growth."

 Federated Investors (FII)
Economic Moat: Narrow
Business Risk: Below Average
Morningstar Rating: 5 Stars
From the  Analyst Report: "Managing primarily money market funds, Federated is one of the more defensive asset managers. We would be happy to own a piece of this growing business at the right price. We think that the shares are worth $41 and that they are a bargain below $28."

 Johnson & Johnson (JNJ)
Economic Moat: Wide
Business Risk: Below Average
Morningstar Rating: 3 Stars
From the  Analyst Report: "Even in the face of tough competition to its most powerful growth drivers, we think J&J is a smart bet for investors. J&J's consumer-friendly veneer shouldn't hide the fact that the company is a cutthroat competitor. While we expect market share to erode on several main products, other units like Cordis and its drug-eluting stent are picking up much of the slack. J&J remains a favorite of ours in the health-care market."

To run this screen yourself and see all the stocks that passed, click  here. (The stocks mentioned above passed our screen as of Sept. 26. The results of the screen may change due to daily price fluctuations or other factors.) After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (Note: You will need to be a Premium Member to view and save the complete screen.)