NEW YORK (MagicDiligence.com) -- There's no two ways about it: The Magic Formula® Investing strategy identifies a lot of cyclical stocks.A cyclical company is one that experiences wider-than-normal variations in its level of sales, due to the inherent boom-and-bust nature of its underlying industry and, sometimes, the overall macroeconomic conditions in the world. Usually, MFI will turn up a cyclical stock well into the boom portion of the cycle, after above-average profits have been booked but right about when investors think the boom will moderate or end, which brings the stock price down. Bingo: the magical combination of a high earnings yield and a high return on capital. One key thing to determine when analyzing a cyclical stock is the nature of its cost structure. These companies will skew in one of two directions: toward a fixed cost structure or a variable cost structure. Let's take a look at each and the advantages and disadvantages.
As a result, inventories dropped, but demand for TiO2 has not -- quite the opposite, in fact. As a result, Kronos has been able to operate its plants at higher utilization while enjoying a 50% rise in the commodity's selling prices! Clearly, the above table shows how gross margin percentage is closely tied to sales levels, a sure sign of a highly fixed cost structure. The downside is that, should TiO2 prices fall again, those margins will come crashing down again.
Despite a revenue swing of almost 250% during this span, gross margin remains the same at right around 46%, meaning the company has very few fixed costs in producing its products. This helps maintain profitable operations even in down periods.