On March 14, the “High Quality” screener identified 22 U.S. companies that have good value potential. Six of these companies have a profitability rank of 9 and a GuruFocus business predictability rank of five stars: Biogen Inc. (BIIB, Financial), Cerner Corp. (CERN, Financial), Edwards Lifesciences Corp. (EW, Financial), Jack Henry & Associates Inc. (JKHY, Financial), NetEase Inc. (NTES, Financial) and Tyler Technologies Inc. (TYL, Financial).
Key measures to determine quality
The quality of a company depends on several factors, including financial strength, profitability and consistency of growth. GuruFocus screens for high-quality companies based on the criteria listed in Table 1.
| Financial strength rank of at least 6 | Price-earnings ratio of at least 6 |
| Profitability rank of at least 7 | Operating margin of at least 16% |
| Predictability rank at least 3.5 stars | 10 years of profitability over the past 10 years |
| 10-year median return on equity of at least 15% | Five-year revenue growth rate of at least 5% |
| 10-year median return on invested capital of at least 16% | Five-year earnings per share without nonrecurring items growth rate of at least 10% |
Table 1
The Screener listed 22 companies, including six that have a profitability rank of 9 and a predictability rank of five stars.
Biogen
Biogen, a global biopharmaceutical company, engages in the development and manufacturing of various therapies to treat patients with neurological and other autoimmune diseases. The company’s financial strength ranks 7, driven by a robust Altman Z-score of 5.69 and good interest coverage of 21.31. As illustrated in Figure 1, Biogen’s operating margin is near a 10-year high of 45.44% and outperforms 95% of global biotech companies.
Figure 1
Several gurus, including Ron Baron (Trades, Portfolio) and Richard Pzena (Trades, Portfolio), have boosted their positions in Biogen in the past five months as the company offers good growth and value potential. At market open, the company’s stock traded approximately $2 higher than its previous close of $283.24.
Cerner
Kansas City, Missouri-based Cerner provides health information technology services to clients to improve efficiencies in health care operations. Even though the company’s operating margin underperforms the 10-year historical average, Cerner still has consistent revenue growth and an excellent Piotroski F-score of 8. Figure 2 shows Cerner’s operating margin and revenue trends from the past 10 years.
Figure 2
Edwards Lifesciences
Baxter International Inc. (BAX, Financial) spinoff Edwards Lifesciences designs and markets various medical devices and equipment for advanced stages of heart disease. As illustrated in Figures 3.1 and 3.2, the company’s profit margins and returns outperform over 90% of global competitors, suggesting higher growth potential compared to its peers.
Figure 3.1
Figure 3.2
Edwards Lifesciences has three positive investing signs, including expanding operating margins, consistent revenue growth and a strong Piotroski F-score of 7, three key indicators of good quality.
Jack Henry & Associates
Missouri-based Jack Henry provides information processing solutions for community banks, including processing transactions and automating business processes. Like Edwards Lifesciences, Jack Henry also has expanding profit margins and consistent revenue growth. Jack Henry’s operating margin of 25.49% exceeds its historical 10-year median of 22.70% and outperforms 90% of global business services companies as Figure 4.1 illustrates.
Figure 4.1
As illustrated in Figure 4.2, Jack Henry had consistent revenue and earnings growth over the past 10 years, the two key measures of business predictability.
Figure 4.2
NetEase
Beijing-based NetEase provides various internet and online gaming services through 163.com. Despite operating margins languishing near a 10-year low of 22.30%, NetEase still has a profitability rank of 9 primarily due to strong revenue growth: the company’s three-year revenue growth rate of 62.40% outperforms 94% of global competitors. Figure 5 illustrates NetEase’s revenue trend over the past 10 years.
Figure 5
Tyler Technologies
Tyler Technologies provides integrated information management solutions and services to address information technology needs for a wide variety of institutions around the world. The company’s financial strength ranks 9, driven by several factors, including no debt, a high return on invested capital of 26.16% and a robust Altman Z-score of 12.78. Figure 6 illustrates the company’s return on invested capital compared to its weighted average cost of capital over the past 10 years.
Figure 6
See also
As discussed in a previous article, Berkshire Hathaway Inc. (BRK.A)(BRK.B) CEO Warren Buffett (Trades, Portfolio)’s investing strategy focuses on the consistency of revenue, earnings and operating margin growth. The Buffett-Munger strategy also considers companies that grow their business without incurring significant debt, i.e., maintain good financial strength.
GuruFocus Premium members have access to a wide variety of features to determine the quality of a company, including 30 years of financial data for U.S. companies, full access to the Interactive Chart and the All-in-one Guru Screener. Premium members can still explore our newest feature, the FilingWiz.
Disclosure: I do not have positions in the stocks mentioned.
