Most S&P 500 companies are lucky if they keep 11 cents from every dollar of revenue after paying expenses. Imagine companies three times that profitable — putting them in a good position to handle whatever hardship the economy doles out next.
Eight companies in the S&P 500, including Intercontinental Exchange, Moderna and Visa, sport sky-high adjusted net margins of 35% or higher over the past 12 months, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That means they keep 35 cents from every dollar in revenue, even after paying all their expenses. Keep in mind net margins measure what percentage of revenue the companies keep from revenue, not absolute net income.
High profit margins are a good indication of just how unassailable these companies' positions are. High profit margins reflect companies with strong pricing power, able to charge a premium for their goods and services. This positions them well for any curveballs the economy might throw, including inflation or higher interest rates.
And all those business traits are highly desirable now. Interestingly, though, the stocks aren't reacting just yet. Shares of the eight most profitable companies are actually down nearly 18% this year on average.
"Margin pressure is widespread, not limited to one or two sectors," said Nicholas Colas of DataTrek Investment Research. "Analysts continue to expect a sharp rebound in second half 2022 margins."
S&P 500 Margins Under Pressure
Higher costs are starting to nibble away at S&P 500 companies' profitability.
Net profit margins in the S&P 500 dropped to 12.3% during the second quarter of 2022. That's higher than the 11.2% average over the past five years and the fifth highest it's been since 2008, says FactSet. But it's down from 13.1% in the same period a year ago, says John Butters of FactSet. Additionally, more than half the companies in the S&P 500, 58%, reported their net profit margin dropping during the quarter vs. the 42% that said their net margins rose.
Nine out of the 11 S&P 500 sectors reported their net profit margins fell in the second quarter. The financial sector's profit margin drop was the worst, falling to 16% from 21.8%.
So where's the strength? Two S&P 500 sectors are mostly driving the strength in net margins: energy and industrials. The net profit margin in energy jumped to 14.6% in the quarter, up from just 6.5% in the same year-ago period.
And some of the S&P 500 companies are showing just how profitable they can be.
Trading For Huge Margins: Intercontinental Exchange
It might be hard to make money trading assets now. But the companies running the marketplaces for the trading to occur are enjoying big margins.
Intercontinental Exchange is the most profitable company in the S&P 500. Its adjusted net profit margin is an enviable 49.4%. That's well past the No. 2 most profitable company in the S&P 500, health care firm Moderna. Intercontinental Exchange, which runs a variety of stock, bond and mortgage trading systems in the U.S., U.K. and other countries, is a profit machine. In the last 12 months, it has earned $3.4 billion in net income, or $6.45 a share adjusted, on just $7.4 billion in revenue.
And when you're this profitable, you can skate through turbulence. Analysts think ICE's profit will rise nearly 4% in 2022. But they also see the company's profit rising in 2023, 2024, 2025 and 2026 as well. Somewhat surprisingly, the stock is down 24.1% this year.
Nice To Have A Duopoly: Visa
Imagine running a business where you skim off 2% to 4% from every single transaction. That's pretty much the business model of Visa. And the company's net profit margin of 41% shows just how unassailable it is. Along with Mastercard it dominates the credit card industry.
You might think financial upstarts like point-of-sale software maker Block might offer a challenge. But most of those systems just piggyback on top of Visa's pervasive network. Regulators have threatened to challenge Visa for years. Perhaps that's why the stock is down 5.9% this year. Because there's no problem with the business' fundamentals. Analysts think the company will make $7.44 a share this year, up nearly 26% from 2021.
Moderna, too, knows the power of its fundamental technology. The vaccine maker's net profit margin hit 42.6% in the past 12 months. Shares, though, are down big time this year: nearly 46%. Investors are simply worried that, while highly profitable, there will be fewer vaccines given this year. Profit this year is seen falling 6% and another 74% in 2023.
The question, though, is can S&P 500 companies protect their margins amid inflation. "Unlikely, but corporate America will do its best to keep margins high in the next economic downturn, helping valuations over the next three to five years," Colas said.
Profit Machines
S&P 500 companies with the highest adjusted net profit margins in the past 12 months
| Company | Ticker | Sector | Net profit margin (adjusted, past 12 months) |
|---|---|---|---|
| Intercontinental Exchange | Financials | 49.4% | |
| Moderna | Health Care | 42.6 | |
| Signature Bank | Financials | 42.1 | |
| CME Group | Financials | 42.0 | |
| Visa | Information Technology | 41.0 | |
| VeriSign | Information Technology | 37.9 | |
| Diamondback Energy | Energy | 35.6 | |
| Discover Financial Services | Financials | 35.2 |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
