Vertex Pharmaceuticals, a Cambridge, Massachusetts, biotech company, had the best profitability performance of any nonfinancial company in the United States over the four quarters ended in September. Vertex vaulted from near the bottom of the CFO EVA Momentum Ranking in the second quarter to number one in the third quarter by achieving a greater improvement in its economic profit, measured as a percentage of prior period sales, than any other company.
CFO and EVA Dimensions rank the profitability performance of all nonfinancial companies in the Russell 3000 with stock prices above $5.00 and sales of $100 million or more in both the current and prior four-quarter periods. (The ranking also excludes oil and gas companies, whose results can be driven largely by changes in energy prices.) The latest ranking covers 1,702 companies for the four fiscal quarters ending in July, August, or September.
The companies are ranked on the basis of their EVA momentum, which is the rate of change in their economic profit, or EVA, stated as a percentage of sales in the prior period. Because it is based on the change in economic profit, EVA momentum measures performance in terms of improvements or setbacks in profitability rather than the level of profitability per se. The level of profitability is captured in a companion measure called EVA margin, which is EVA as a percentage of sales.
EVA momentum permits direct comparisons of profitability performance across industries and across companies of different size. It has a clear dividing line between good and bad performance, which is zero EVA momentum. Any positive reading means economic profit has increased, while a negative reading means EVA has declined. Scaling the change in EVA to prior-period sales, rather than simply taking the percentage change in EVA itself, also allows comparisons of companies that have negative EVA with ones that are earning positive economic profits.
Vertex vaulted to the top of the latest ranking on the sales of a new drug for hepatitis C called telaprevir, which it began selling in May under the brand name Incivek. Sales of telaprevir boosted Vertex’s revenues to $913 million, more than eight times the $112 million in the four quarters ended in September 2010. That enabled Vertex to improve its EVA profit by $306 million, or 274% of its sales in the prior period. Yet the company still had an economic loss in the most recent period. Its EVA was negative $156 million in the latest four quarters versus an economic loss of $462 million in the prior four quarters. Most of the improvement in both sales and EVA came in the most recent quarters. In the prior ranking, through the second quarter of this year, Vertex had sales of just $277 million and EVA of -$458 million.
Vertex’s triple-digit EVA momentum is a true outlier. Most EVA momentum scores are quite small, which is to be expected. After all, EVA momentum is the change in EVA as a percentage of sales, so it is bound to be a small number for almost all companies. In the most recent ranking, the median EVA momentum was 1.0%, while companies at the 90th and 10th percentiles had scores of 5.6% and -2.2%. The number-two company, Verisign, had EVA momentum of 36.4%.
The companies that scored first in each of 48 industries are displayed here. Most of the industry leaders also are companies with outsized sales growth. Even excluding Vertex’s huge increase, the industry leaders had average revenue increases of more than 30%, nearly double the average growth for the entire ranking. Only three industry leaders had large sales declines: Argan (construction) and Pulte (home building) — which hardly are surprises given how the lackluster economy has depressed those sectors — and Dine Equity, which has been hiving off unprofitable Applebee’s restaurants since acquiring the chain.
Some 29 of the industry leaders are unchanged from the prior quarter, which is to be expected. The ranking is relatively stable from quarter to quarter because it covers rolling four-quarter periods. With just one new quarter and three that were in the prior ranking, it generally takes a really great — or awful — quarter to move a company’s rank dramatically, as Vertex’s booming sales did in the third quarter of this year. Most of the new leaders in the other 19 industries already ranked number two, three, or four in the prior ranking. Similarly, most of the companies that were displaced dropped only one to three ranking spots.
Al Ehrbar, chief operating officer of EVA Dimensions LLC, writes a regular column based on the EVA Momentum Ranking for CFO.