Profitability is a key metric used when determining how efficiently a company is being managed. Net profit margin is used to evaluate a company’s profitability, providing clues to the company’s pricing policies, cost structure, and production efficiency. On the other hand, ROE measures how a company is using its money.
In this article, three highly profitable technology stocks with a healthy balance sheet (debt/equity below 0.1), high net profit margin (larger than 20%), and high ROE (larger than 30%) will be presented, including FactSet Research Systems Inc. (NYSE:FDS), AOL, Inc. (NYSE:AOL), and Syntel, Inc. (NASDAQ:SYNT).
FactSet Research Systems Inc. (NYSE:FDS)
The company has a market cap of around $3.96 billion and is currently trading at a Forward P/E of 16.3. The stock is trading nearly 16% below its 52-week high, and analysts have a target price of $95.20 for FactSet, suggesting 4.85% upside potential.
Fundamentally, the company has high operating margins (33.8%) and net margins (23.5%), as well as a stronger ROE (34.4), as compared to peers in the business services industry. FactSet has total cash of $166.14 million and zero debt. The company is currently trading at a P/E ratio of 21.4, which is under-valued compared to the industry average of 29.6.
Buy, Sell, or Hold
FactSet, as a leading provider of financial data, should continue grow in the long-term as investors/customers continue to seek valuable financial data. FactSet is estimated to achieve 13.5% annual EPS growth in the next 5 years. At current valuation, FactSet remains a long-term buy.
AOL, Inc. (NYSE:AOL)
The company has a market cap of around $2.79 billion and is currently trading at a Forward P/E of 15.1. The stock is trading almost 8.50% below its 52-week high, and analysts have a target price of $40.14 for AOL, Inc. (NYSE:AOL), suggesting 10.37% upside potential.
Fundamentally, the company has high operating margins (54.8%) and net margins (47.8%), as well as a stronger ROE (48.6), as compared to peers. AOL, Inc. (NYSE:AOL) has total cash of $466.6 million with a total debt of $105.9 million. The company is currently trading at a P/E ratio of 3.2 only, which is under-valued compared to the industry average of 28.2.
Buy, Sell, or Hold
AOL, Inc. (NYSE:AOL) continues to generate strong cash flow at an attractive price (P/FCF of 9.33). With estimated 27.1% annual EPS growth for the next 5 years, more upside is expected for AOL in the long-term. At current valuation, AOL, Inc. (NYSE:AOL) remains a good long-term buy.
Syntel, Inc. (NASDAQ:SYNT)
The company has a market cap of around $2.77 billion and is currently trading at a Forward P/E of 13.1. The stock is trading around 1.93% below its 52-week high, and analysts have a target price of $68 for Syntel, suggesting 3.05% upside potential.
Fundamentally, the company has higher operating margins (29.3%) and net margins (25.6%), as well as a stronger ROE (35.0), as compared to peers. Syntel has total cash of $421.27 million with total debt of $50.62 million. The company is currently trading at a P/E ratio of 14.9, which is under-valued compared to the industry average of 20.7.
Buy, Sell, or Hold
Syntel, as a provider of IT and knowledge process outsourcing services, continues to offer a good mix of income and growth. With estimated 16.67% annual EPS growth for the next 5 years, more upside is expected for Syntel in the long-term. However, with the recent run-up, investors might want to wait for a safer entry point to establish the long-term position, as the stock is currently in the over-bought condition (RSI over 70).
Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
The article 3 Highly Profitable Technology Companies Identified originally appeared on Fool.com and is written by Nick Chiu.
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