It might sound arcane, but S&P 500 companies' profit margins are getting more important to investors. And it's at least one area Warren Buffett's Berkshire Hathaway is outpacing Elon Musk's Tesla.
Berkshire Hathaway is among 13 S&P 500 stocks that keep at least 30 cents of every dollar of revenue even after paying all expenses in their most recently reported quarter, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Such sky-high adjusted net profitability is rare in the S&P 500 — on average companies only keep 11.6 cents of every dollar in profit, says FactSet. But it's also indicative of businesses that Buffett likes — especially in the face of stubborn inflation that tries to erode profits.
Tesla's net adjusted profit margin pales next to Berkshire Hathaway's. And it fell to just 5.4% in the just reported third quarter. That's down from 10.4% a year ago and a far cry from Berkshire Hathaway's 30%. And Tesla's falling profit margin is a big reason its huge gains this year are slipping away. It might also be a reason Buffett passes up on investing in Tesla.
"In a nutshell we would characterize (the third-quarter earnings) conference call as a 'mini disaster' as the Street wanted to get their arms around the falling margins and constant price cuts seen globally," said Wedbush analyst Dan Ives in a note to clients.
The Rise Of Profit Margins
High profit margins demonstrate S&P 500 companies' ability to maintain pricing power. And that's key during periods of inflation.
That's not lost on investors. Shares of the 13 S&P 500 companies with the highest adjusted net margins are up an average 22.4% this year. That easily tops the S&P 500's 10% gain. And these stocks are only down 4.5% since the S&P 500 peaked this year, much less than the index's nearly 8% drop in that time.
Profit margins are getting harder to maintain. The S&P 500's profit margin of 11.6% is below year-ago levels of 11.9%. And it has fallen from year ago levels for seven-straight quarters, says John Butters of FactSet.
Tesla's Shrinking Margins
Tesla is a case in point of shriveling profit margins. It's falling closer to that of other S&P 500 automakers.
The company's net profit margin of 5.4% in the most recent quarter is down from 7.7% in the June quarter. That barely edges out General Motors and Ford Motor with 4.4% and 3.3% adjusted net margins in their most recent quarters.
Other Net Margin Champions In The S&P 500
So what kinds of S&P 500 companies sport powerful margins?
Given the huge demand for its AI products and its stock, it's not surprising to see Nvidia sporting off-the-charts margins. Its adjusted net margin hit 32% in the most recent quarter. Demand for its semiconductors is so strong, availability has been tight for some time.
And thanks to their locks on a growing amount of transactions, both top credit card processors Visa and Mastercard command impressive net profit margins of 42% and 36%, respectively.
It's tough to know if these companies will protect their margins if inflation continues to rage. But you can be sure it's something Buffett pays close attention to.
S&P 500 Companies With Highest Net Profit Margins
In most recently reported quarter
| Company | Ticker | Last reported quarter's net adj. profit margin |
|---|---|---|
| VICI Properties | 47.7 | |
| CME Group | 46.7 | |
| Visa | 42.4 | |
| VeriSign | 40.7 | |
| Altria Group | 39.8 | |
| Marriott International | 38.7 | |
| Mastercard | 35.9 | |
| Nvidia | 32.3 | |
| Public Storage | 31.8 | |
| Vertex Pharmaceuticals | 31.6 | |
| MSCI | 30.9 | |
| Hilton Worldwide Holdings | 30.4 | |
| Berkshire Hathaway | 30.3 |
