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Number Cruncher

Companies geared up for future profit growth Add to ...

What are we looking for?

Yesterday, we presented a slightly modified version of a stock screen from Brockhouse Cooper global macro strategist Pierre Lapointe, looking at major global companies that have seen substantial increases in both their capital spending (or capex, for short) and their profit margins over the past year. Today, we produce a similar screen focusing on Canadian stocks, while adding a twist of our own – debt reduction.

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The screen

As Mr. Lapointe noted in his recent report on this topic, most companies have enjoyed surging profit margins in the post-recession recovery, but many have been unusually conservative in spending the resulting influx of cash. With profit margins having peaked and showing signs of turning downward, he said, companies are going to have to invest that cash in building their business if they expect their profits to grow. That means more capital spending – investing in property, facilities and equipment.

“To us, the best strategy is to focus on companies which are working on increasing their market share by expanding,” he said. “The ones with growing margins are even better positioned.”

To that end, Mr. Lapointe screened the S&P Global 1200 – a composite of large-cap companies from the world’s major stock markets – for exceptional growth in both capex and profit margins over the past year. Following his lead, we’ve used a similar screened the S&P/TSX composite index, using these two criteria:

-The ratio of capex-to-revenues has increased by more than 20 per cent over the most recent year;

-Net profit margins from continuing operations have increased by more than 20 per cent over the most recent year.

But those numbers got us thinking: Capital spending isn’t the only healthy use for excess cash. Couldn’t companies also be putting those swollen profit margins to good use by paying down debt?

So, we added a third criterion to the screen: Companies must also have reduced their debt-to-equity ratio in the most recent year. In other words, we’ve identified companies with strong profit margin growth that are both ramping up their capex and improving their balance sheets.

What we found

These three criteria generated a short list – just 11 of the 253 companies on the S&P/TSX composite cleared all three hurdles. (We've listed them alphabetically in the accompanying table.)

Remember, the screen is only a starting point for identifying names that may fit a potentially interesting investing theme. You’ll want to more carefully research each company before making any investing decisions.

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