Over the next few weeks, we’ll look at profit margin analysis in an article from the SmallCap Informer newsletter.
Industry & Peer Comparisons
Analyzing the trend of margins is critical, but it’s not the only measurement that should be taken. A company’s margins can be compared to its peers and industry group, as well, illuminating how the company stacks up to competitors.
But it’s imperative to note that pre-tax margins vary considerably by industry. Some industries, particularly those with very competitive business climates, are at the end of multistage supply chains or deal with highly perishable goods typically sport very low margins.
The following table shows average profit margins of some typically low-margin industry groups, courtesy of StockCentral.com’s Sector & Industry Average Browser:
| Industry |
Avg 5-Yr PTP/Sales |
| Grocery Stores |
3.0 |
| Department Stores |
4.4 |
| Auto & Truck Dealerships |
5.1 |
| Discount Stores |
5.6 |
| Auto Parts |
6.1 |
| Specialty Retail |
6.7 |
| Airlines |
7.1 |
| Building Materials |
7.3 |
| Pharmaceutical Retailers |
7.8 |
| Farm & Construction Equipment |
8.0 |
In the context of a low-margin industry such as grocery stores, Fresh Market Inc.’s average pre-tax margin of 5.3% is a real standout.
Contrast those values with some of the following commonly higher-margin industry groups:
| Industry |
Avg 5-Yr PTP/Sales |
| Marketing Services |
39.9 |
| Drug Manufacturers-Specialty/Generic |
27.2 |
| Drug Manufacturers — Major |
24.1 |
| Biotechnology |
21.6 |
| Insurance Brokers |
20.4 |
| Pay TV |
18.7 |
| Software — Infrastructure |
17.4 |
| Beverages — Brewers |
15.9 |
Microsoft’s average five-year margin of 38.4% is near the very top of the software-infrastructure industry, and it’s more than seven times higher than the margin of Fresh Market. Does this mean that Microsoft is a “better” company than Fresh Market? Absolutely not. Each company should only be evaluated on the basis of its own peers. Those that excel in the comparison are the leaders that should be prime candidates for consideration.
Next Installment: Digger Deeper into Margins
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