Barron’s 400 Index companies regularly surpass S&P 500 companies in earnings growth. One of the main reasons is that the profit margins of the financially strong Barron’s 400 companies are running nearly 20% larger than those in the S&P 500.
Profit margin is a measure of how well companies convert top-line revenue into bottom-line earnings. It’s simply calculated: Divide income by revenue. There are two variations perused by financial analysts. The first uses net operating income, which is revenue minus all expenses except interest charges and income taxes. The second uses net income, which is operating income minus interest charges and income taxes.
The charts below show how profit margins of the Barron’s 400 compares to those of the S&P 500 over the past 10 years.
These charts prompt three observations. First is that the only occurrence of near parity in profit margins was during the trauma of the financial crisis. Otherwise, the margins of the two indexes were distinctly separate, though of course they varied from year to year.
Second, the Barron’s 400 companies pulled out of the financial crisis earlier and more strongly than those in the S&P 500—likely a consequence of their sounder financial footing, which among other things means limited debt as a portion of total capitalization and constrained interest payments.
Third, the gap between the indexes’ aggregated profit margins widened in 2016. While big jumps in the Barron’s 400 margins were the primary reason, there also was a slight drop in the S&P 500’s margins. We’ll keep an eye on further developments in this regard.
Data for these charts was drawn from the following table, which was calculated by dividing aggregate trailing 12-month income by aggregate trailing 12-month revenue of the component stocks as of each year-end. That means some companies in both indexes were omitted from the calculations because their stocks didn’t happen to be components on Dec. 31. For the Barron’s 400, which is reconstituted semi-annually, that includes many companies added in March of each year but dropped six months later, in September. Other companies were omitted because their year-end data didn’t stretch back a full 12 months, usually because of acquisitions, mergers and spin-offs.
|Oper. Income Margin||Net Income Margin|
|B400||S&P 500||B400||S&P 500|
Future Diaries will examine profit margins of Barron’s 400 and S&P 500 companies from other perspectives.