This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Stocks Under $10 With SU10Team

Examining a Company's Profit Picture

By SU10 Team | 2017-07-20 08:00:00.0
Stocks in Focus: BETR

We recently shared the first five of a series of questions that you must be able to answer before you decide whether to buy a share of stock in a particular company.

To quickly recap, the first five questions are:

1. What does the company do?

2. What are its key products or services?

3. In what business unit or units does the company make most of its profits?

4. Who are the key competitors and how are they impacting the market?

5. What is driving growth at the company?

If you missed the more in-depth explanation of those questions, you can find it here. You may want to review those questions because the next five build on their answers.

The gist of those five questions is to help you understand the company you are investing in and items to pay attention to when sizing up what's on the horizon, both good and bad. After all, how do you know how to gauge a company's business and the competitive landscape if you don't have a firm understanding of what the company does and how it makes money for itself and its shareholders? These are some of the tools I use each time I look at a new opportunity.

OK, let's get to question 6.

6. What is driving the company's profit picture and, if it's not improving, why not?

The answer to this two-part question hinges on what is happening with a company's profits. I tend to look at a company's operating margin: operating profit divided by revenue. There are several parts of the income statement that come into play calculating a company's operating profit.

Operating Margin = Operating Profit/ Sales

To calculate a company's operating profit, we use the following formula:

Operating Profit = Sales – Cost of Goods Sold – SG&A

Before we get to the nitty-gritty, let's pluck a real-world example from one of our holdings and use Amplify Snacks (BETR:Nasdaq), which has been on a tear of late. We'll use the company's most recent quarterly earnings report, which you can find here.

Operating Profit = Sales – Cost of Goods Sold – SG&A

Operating Profit = $87.2 – $51.9 – $16.8 = 18.5*

*Note: All figures are in millions of U.S dollars

Now moving to its operating margin for the quarter:

Operating Margin = Operating Profit/Sales = 18.5/87.2 = 21.2%

So we have the number, but what does it mean?

Generally speaking, a company's profit picture can improve when it earns more per dollar of revenue. If Starbucks (SBUX:Nasdaq) raises its price on a cup of coffee or Apple (AAPL:Nasdaq) is benefiting from higher prices on its latest iPhone models, odds are that such a company's margins will be rising. If, however, Starbucks initiated that price increase to fend off the pain of higher coffee prices or rising wages, the company's margins may improve, but maybe not as much because the benefit of the price increase is offset by higher costs to the company.

Companies also can see margin improvement due to something called "economies of scale," which means the more a company builds a product, the more efficient it will get. Hand in hand with that robust product volume may go more favorable costs associated with key parts or ingredients that go into the product. Also look for when a company initiates a new manufacturing technology or improves its materials to lower its production costs.

This is not rocket science, but using some basic math mixed with some finance. Another way a company can see its profitability improve is through lower costs. Take the Starbucks example above. If coffee prices drop and Starbucks keeps its coffee prices intact, its operating margin should benefit from the fall in coffee prices. If Starbucks was enduring the pain of higher coffee prices, then hiked prices on its coffee drinks and incurred a fall in coffee prices, that situation would bring a one- two benefit to Starbucks. The benefits of a price increase and falling coffee or input costs equals cha-ching for Starbucks!

Of course, coffee is one input among many at Starbucks. But that's why you need to read the company's financial filings to determine which inputs are critical. The same goes for other companies and other parts and ingredients. As it relates to Amplify Snacks, the key input we are watching is corn, but as it brings more products to market, odds are the influence of corn prices will dip as others rise.

One of the things I am fond of saying is context and perspective are critical. This means understanding how a company's operating margin compares to the prior few quarters as well as the year-ago quarter and what a company's guidance means for the coming quarters. That context allows us to understand if operating margins are expanding, standing still or contracting. Generally speaking, expanding operating margins lead to rising EPS and declining operating margins deliver falling EPS.

A quick example can be had as we compare Amplify's March 2017 operating margin of 21.2% with its December 2016 quarter (the figures to calculate this can be found here) that came in at 24.5%. Recall that Amplify is not only expanding its product portfolio both in the U.S. and Europe, but it's also bringing more products to market. We also saw a step down in product sales, which is seasonal in nature from the holiday-filled December quarter. That combination led to the quarter-over-quarter drop in Amplify's operating margin.

Our next question will deal with understanding a company's balance sheet.


Christopher Versace

Adding to a Name on Weakness
Stocks in Focus: INO, ACRX

It's hard to ignore INO's price this far below our cost basis.

07/19/17 - 10:53 AM EDT
USA Technologies Shares Positive Revenue Update
Stocks in Focus: USAT

The company said it received a "substantial" repeat order from an existing customer that dramatically increased its service revenue last quarter.

07/19/17 - 07:34 AM EDT
Stocks Under $10 Weekly Summary

We brought a new name into the portfolio last week as the Fed's comments helped lift the market.

07/17/17 - 05:44 PM EDT

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and the AAP Team reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

The SU10 team uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Top Stocks

With Top Stocks, Helene Meisler uses short and long-term indicators to pinpoint imminent breakouts in stocks.

Product Features:
  • Daily trading ideas and technical analysis
  • Daily market commentary and analysis
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
14-Days Free
14-Days Free
14-Days Free

Special Subscription Bundles

Want more than one service?
Sign up to one of our packaged services and take advantage of amazing savings!

Real Money Pro
Chairman's Club
Action Alerts PLUS checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Stocks Under $10 checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Quant Ratings
checkmark | Portfolio Plus checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Real Money checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Real Money Pro checkmark | Real Money Pro Portfolio checkmark | Chairman's Club
Trifecta Stocks checkmark | Chairman's Club
Action Alerts
checkmark | Chairman's Club
Daily Swing Trade checkmark | Chairman's Club
Top Stocks checkmark | Chairman's Club
Started Now Started Now Started Now


Chart of I:DJI
DOW 21,611.78 -28.97 -0.13%
S&P 500 2,473.45 -0.38 -0.02%
NASDAQ 6,390.0021 +4.9602 0.08%

Stocks Under $10 Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
ATRS 0.029168920062971265 Health Services
AXTI 0.028907566539207043 Electronics
BETR 0.043494640105930314 Food & Beverage
TLGT 0.03171711691967243 Drugs
USAT 0.027189517147498034 Computer Software & Services
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
ACRX 0.021876690047228448 Health Services
AUY 0.042462363692469786 Metals & Mining
ENZ 0.010706160419912973 Health Services
HDSN 0.004074314754395826 Industrial
IWM 0.17231775212074385 Financial Services
PXLW 0.023078449553822863 Electronics
SIRI 0.010192787426804678 Media
ZIXI 0.018491928563121263 Computer Software & Services