See the profit margin of these companies

If a company has a large profit margin, that’s a good sign for two reasons. Customers want its goods or services enough to pay a high price. And the company doesn’t let expenses grow.

Due to their high profit margins, I recommend ON Semiconductor Corp. (ON), Martin Marietta Materials Inc. (MLM), Devon Energy Corp. (DVN), T. Rowe Price Group Inc. and Snap-on Inc. (SNA).

This is 15^t column in which I wrote about companies with pleasantly high profit margins. Over the past 14 years, my picks in this series have averaged an annual return of 17.5%. That beats the Standard & Poor’s 500 Total Return Index’s average of 15.8% over the same periods.

Please note that the results in my columns are hypothetical and should not be confused with the results I obtain for clients. Furthermore, past results do not predict the future.

Here are five new high-margin items.

NA Semiconductor

ON Semiconductor, a company specializing in semiconductor chips for cars, has a ten-year revenue growth rate of over 11% and a profit growth rate of over 27%. However, the company saw a slight decline in revenue and profit last year.

Was this just a bump or a brick wall the company has hit? Analysts are split on the issue. Of the 33 analysts covering the company, 19 rate it a buy, while 14 rate it a “hold” or “underperform.”

I believe cars of the future will need even more chips than cars of today. And I like ON’s net profit margin of almost 25%. So I assume the recent slowdown was just a temporary slump.

Martin Marietta

There were two companies named Martin Marietta. One merged with Lockheed Corp. to form Lockheed Martin Corp., the largest U.S. defense contractor by revenue. The other, Martin Marietta Materials, is what I recommend today.

The Raleigh, N.C.-based materials company supplies crushed stone, gravel, sand and cement. That may sound mundane, but the stock has doubled in the past five years, and the company’s net margin is nearly 31%.

The recent increase in federal infrastructure spending has helped this company, and I expect this positive impact to continue for the next several years.

Devon Energy

Energy companies are said to be more “oily” or “gaseous” depending on the mix of oil and gas they produce. Devon, based in Oklahoma City, Oklahoma, is relatively gaseous. In the most recent quarter, its production was 29% natural gas and 28% natural gas liquids.

Devon appears to be putting together its fourth consecutive very profitable year, after posting losses in six of the previous nine. I think the stock, at eight times earnings, is quite attractive. Net margins have recently been above 22%.

T. Rowe Price

T. Rowe Price, an investment firm specializing in mutual funds and employee benefit plans in Baltimore, Maryland, boasts a net margin of more than 28%. The stock has been a dud over the past five years, now trading just below where it was five years ago.

I think financial stocks will benefit if the Fed cuts interest rates in the next few years. Selling at less than 13 times earnings, the stock looks like a good bet to me.

Snap-on

Based in Kenosha, Wisconsin, Snap-on Inc. provides repair tools and software to auto repair shops. It operates as a franchise. Franchisees receive a red-and-white truck from Snap-on, along with the equipment to fill it. They then distribute it to gas stations and other auto repair shops.

Franchisees earn between $60,000 and $130,000 annually, according to third-party reports. Snap-on itself has earned just over $1 billion over the past four quarters, on revenue of about $5 billion.

Some believe the advent of electric cars will hurt business because electric cars have fewer parts than gasoline-powered cars. In my opinion, car repairmen will need both types of tools for the next five years or more.

Last year

My wide margin stocks outperformed the S&P 500 prior to last year. My 2023 picks were a disaster.

They fell 7.5%, while the S&P 500 rose 26.9% with dividends reinvested. None of my picks did particularly well. The worst performers were Livent Corp. (now part of Arcadium Lithium PLC) and Utah Medical Products Inc. (UTMD), both down nearly 24%.

This poor performance was all the more disappointing as it followed a very strong performance from 2022-2034, when my large margin picks returned 32.94%.

Disclosure: I personally own Snap-on and for most of my clients. My wife Katharine Davidge, who is a portfolio manager at my firm, owns ON Semiconductor for herself and some clients.