March Midness 2015 Round III: Efficiency

March 25, 2015 |

Which company has more efficient operations?

It’s Round III of March Midness, a tournament of mid cap stocks. In the first two rounds we looked at earnings growth and financial health, winnowing our list down to our Elite Eight: Centene (CNC), Gentex (GNTX), Maximus (MMS), Open Text (OTC.TO), Polaris Industries (PII), Taro Pharmaceutical (TARO), TransForce (TFI.TO), and Tyler Technologies (TYL).

Interestingly, that gives us two each in the sectors of consumer cyclical (GNTX and PII), healthcare (TARO and CNC, which face off in this round), industrials (MMS and TFI.TO), and technology (OTC.TO and TYL). Here is the tournament bracket showing the match-ups:

march midness bracket

In this round, these companies will be competing in the category of efficiency. We’re looking for increasing trends in operating margin, return on equity (ROE), return on assets (ROA), and return on invested capital (ROIC)—all measures of profitability. We’re also looking for a decreasing trend in receivables as a percent of current assets (called “Receivables %” in Stock Rover), which essentially indicates that the company is getting better at collecting what it’s owed. I’m also factoring in the Morningstar profitability grade, which is based on the “average level of a company’s returns on capital over the past 5 years, its capital return trend, and consistency.”

In other words, we want to see that, over time, these companies are getting more bang for their buck.


Scoring in this round is simple. I will compare the 5-year trends of the competitors in each of the categories mentioned above, awarding a point to the company demonstrating a stronger trend in any given category. Whichever company gets more points wins the match.

I will primarily be using charts in order to determine trends, using historical data in the table to verify. If the trends are too similar or inconclusive, I will then simply award a point to the stock that has made the bigger leap in 5 years. In the category of the Morningstar profitability grades, whichever company has a higher grade gets a point. If they have the same grade, no points are awarded.

The Matches & Results

Comparing the efficiency trends for all competitors has resulted in the following scoresheet:

efficiency scoresheet

Here is a brief overview of each of the matches.


This was a rout. Centene displayed flat or counter-productive trends in most categories, Taro Pharmaceuticals was powerful in all categories except receivables %, where it still won, if in less style. This 5-year operating margin chart (shown underneath the price chart, below) was typical:

cnc vs taro

TARO might have beat any of the other Elite Eight in this round, but it happened to be paired with one of the two weakest competitors in efficiency. Here is a 10-year table for all the efficiency metrics considered:

cnc vs taro table

In scoring this match, I was only looking at the last 5 years, but the 10-year context underscores the win. TARO has so far lived up to its #1 seeding and shows no signs of slowing down.


You may recall from the last round that Tyler Technologies was our lowest-seeded survivor, having been ranked as #30 in the original ranked screener used to find the March Midness competitors. However, its underdog run comes to a close this round. Competitor Polaris Industries played a very strong game and won in all but one category. Here is a snapshot from the ROIC category, where PII (in blue) won definitively. Interestingly, their price performance (top chart) was fairly similar over the last 5 years, with TYL displaying just a bit more volatility.

pii vs tyl

Tyler did win in the receivables % category, partly because it had rapidly decreased its receivables percentage to 32.5% from an historically high base of about 75%. PII’s receivables % was lower overall, but has wavered over time, increasing modestly.

Also worth noting: PII was the only equity in the Elite Eight other than TARO to receive an A for profitability from Morningstar. All other companies received C’s.


This was our closest match. Maximus, which was a standout in the financial health round, was strong in most categories, ultimately winning the match. Open Text also performed well in most categories, but it was simply outperformed. Take ROE, for example:

mms vs otc

OTC.TO still got in a few hits. While MMS demonstrated a slow but perfectly respectable trend in operating margin, OTC.TO had it beat with a faster rising trend.

Here is the efficiency table for both stocks over 10 years. Again, only the 5-year period was used for scoring, but the 10-year context shows how far both companies have come:

mms vs otc table

So OTC.TO is out, but perhaps not down—the stock has done quite well in the tournament (remember it was ranked third for growth in Round I) and might still be worth a closer look as a potential investment.


Auto parts maker Gentex, seeded 17th by our screener, has turned out to be one of the strongest equities in the tournament so far. I was not surprised when it sailed through this round, in this case trouncing Canadian logistics company TransForce. GNTX looked solid in most categories, while TransForce seems to be running on much thinner margins that in some cases are getting thinner.

Here, for example, is the ROIC chart. Gentex is steady at best with its ROIC trend, but that is more than you can say for TransForce, whose ROIC, displays an inconsistent and ultimately negative trend:

gntx vs tfi

Meanwhile, the price chart (top chart) shows that, despite being the loser in this round, TransForce has been a clear winner for its investors in the last 5 years.

Though flat in ROIC, GNTX has slow but steady increases in operating margin, ROA, and ROE. Its receivables % has increased modestly as well, but it is far lower (currently 19.6%) than TFI.TO’s astronomical 94.1%, which has hardly changed in 10 years.

Moving Up

Taking these results to our bracket, we have our Final Found match-ups:

march midness bracket

The competition has truly heated up—all of these equities have demonstrated considerable might throughout this tournament, and any of these four seems like a potential champion. Both our technology stocks were knocked out in this round, while the consumer cyclical, industrials, and healthcare sectors are still represented. In the next round, we’ll be using a mix of quantitative and qualitative data to assess competitive advantage and peer context.

Until then! Thanks for tuning in.

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