One way to search for companies that have economic or industry "moats" protecting their business is to look for high gross or net margins. An average company may have a net margin of 10%-12%. Lower than that doesn't mean the company is bad or dangerous. It just has to work harder and keep revenue volume up high to achieve the same good return.
Here are three well-known companies that have a price-earnings (PE) ratio of 15 or less and net profit margins in excess of 20%.
Cabcharge (ASX: CAB) has been on a downtrend since May 2012 with share price currently around $4, and a price-to-earnings (PE) ratio of 7. This is not a fast grower, with five-year average annual growth of net profit after tax (NPAT) only 0.53%, but it is a stable earner.
Earnings per share (EPS) are slowly rising, so the lower share price and steady earnings have made this stock's dividend yield 7.4%. Market expectation is not very strong due to the Victorian government capping the service fee for electronic payment at 5%, down from 10%, which based on previous year's figures would mean $11 million in revenue, or about 5% of total revenue.
Net profit margin is 36.2% and has been over 30% since 2006, so the company can earn a premium on its service and maintain it. It has added another 100 taxis to its Taxi Network operations, and has expanded its use of technology to make credit card payments quicker and easier for customers, and using it to lure private taxi owners to use its pay system.
Oil and gas production giant Woodside Petroleum (ASX: WPL) released its third-quarter report, showing that although revenue for the quarter was down 0.5% from the previous quarter, it was down by $500 million or 26.8% compared to the third quarter last year. Oil and gas sales were down because of planned maintenance, an outage and poor timing of shipments.
Net profit margin from the 2013 interim report was 30%, and it was 33% in the 2012 full-year report, so although the full year ROE is a respectable 13%, five-year average annual EPS has only been 3.34%. High capital expenditure costs for developments like its offshore Browse project will keep net earnings down until they are fully constructed. Its share price is $38.45 with a PE of 15.
Twenty-First Century Fox (ASX: FOX) was formed as a spin-off of the entertainment, movies and pay TV assets from Rupert Murdoch's News Corp (ASX: NWS), and was listed separately on the ASX in July this year. Since then it has risen 16.4% from $31.20 to $36.33.
It operates popular channels such as Fox Sports, National Geographic Channel, and produces movies and television programming. It owns 50% of Foxtel pay TV, with the other half owned by Telstra. Its maiden earnings as a standalone company were $3.16 per share, up 92% from $1.62 per share within its previous business segment. Its PE is 11 and its net profit margin is 24.8%.
Its final dividend was 12 cents per share unfranked, so you won't be chasing yield here. This is a market share play. It has control of the pay TV market in Australia, and will be monetising it more with its plans of joining up with Telstra to possibly bundle TV, phone and pay TV/video on demand services.
Foolish takeaway
Usually, companies with high margins can add a premium without driving customers away because of an economic advantage or high demand. Currently at reasonable PE ratios, these three deserve your examination to see how they might work within your portfolio to create long-term steady earnings.
