The 5 Most Profitable Products on the Market

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many of the top U.S. companies derive a significant portion of their revenue and profit from only one or two products. In this article I'll take a look at the top five products as ranked by one gauge of profitability --- operating margin --- and how those products affect the businesses that market them. The list was compiled by 24/7 Wall Street.

Baby formula

Ranked number five is Enfamil, which is distributed by Mead Johnson Nutrition (NYSE: MJN). Sales of the baby formula add $2.3 billion in annual revenue to the top line. After subtracting costs the operating margin works out to be 24%. Overall margin growth at the company has been flat recently. The product has 15% of the market share.

Baby formula is in a growth phase in some emerging markets, and in China, it is exploding. Expect continued earnings growth for the company going forward (it has averaged 17% over the last few years) if the company can maintain or increase the margin going forward.

Higher earnings may also allow the company to keep increasing its dividend, which they have been doing since 2010.

Beverages

Let’s move up on the list to number four. The world's top-selling soft drink, Coca-Cola, has an operating margin of 25%. Margins have been stable over the past few years. The product is distributed by The Coca-Cola Company (NYSE: KO). The Atlanta-based company sells $14.3 billion worth of Coke annually and controls 42% of the market.

With the world-wide market for sugary soft drinks expanding at a steady rate, expect earnings to grow as well because of the wide moat that the drink provides. Coke is the sixth most recognized brand name on the planet.

The cash flow Coke produces allows the company to regularly grow its dividend and buy back shares. Investors are rewarded every quarter with a payment of $0.28 a share.

The third most profitable product is another drink. Monster Energy has an operating margin of 27% which has also been stable recently. The high octane beverage provides nearly $2 billion towards sales for Monster Beverage (NASDAQ: MNST).

The relatively new product, introduced in 2002, has helped drive strong double-digit revenue and earnings growth for the company. The key question is whether the trend will continue. The company needs to deal with a couple of issues: a backlash against the drink from consumer groups and the media and increasing production costs. If it succeeds then expect Monster to maintain the high operating margins and earnings growth.

Cigarettes

The runner up on the list is Marlboro brand cigarettes. It has a 30% margin, which has been increasing , and provides $19 billion in sales for Altria Group (NYSE: MO). Marlboro also provides a wide moat for the company as it is the world's 7th most recognizable brand and has a 42% market share.

Just like at Mead Johnson and Coca-Cola, future growth prospects for Altria lie mostly in overseas markets.

And as was the case of Monster, whether or not the growth trend continues depends in part on acceptance of the product by the general public in the face of health advocacy efforts.

And the winner is .....

The most profitable product, and probably not a big surprise to many, is Apple's (NASDAQ: AAPL) iPhone. The device has an incredible 40% operating margin, which admittedly has been declining over the past year in the face of stiff competition. Nonetheless, iPhone sales comprise more than half of Apple's total revenue of $156 billion and earnings of $55 billion.

Apple sold 125 million iPhones in 2012, a 73% increase over the previous year. The device has about 20% of the market.

Despite the huge success of the device and other great products that Apple has developed (such as the iPad), the stock has taken a beating recently. It is down 25% year to date and is off nearly 43% from its all-time high reached last September. Investors are betting that the company has run out of ideas and earnings growth will stumble unless they innovate and release the “next big thing”.

Apple is attempting to stem the sell-off using financial engineering. It has announced a 15% dividend increase and will expand its stock buyback program. The company will fund the expenditures by issuing debt. I expect the strategy to help in the long run although it is also very important for Apple is to release a new product like iTV or some type of wearable device. I wouldn’t be surprised if the stock really took off if that happened.

Conclusion

There is something to be said for companies that develop products that have large (and increasing) operating margins.

Of the five companies I highlighted above, only Altria has been able to significantly grow its margins recently. The others have reported relatively flat or declining numbers.

Big market share numbers in the cases of Coca-Cola and Monster help these firms overcome the lack of margin growth. Mead Johnson needs to succeed in high growth markets to continue to be successful.

Apple needs to overcome lots of competition in order to reverse declining margins. A new product release to compliment the iPhone is badly needed.

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Mark Morelli owns shares of Apple and Coca-Cola. The Motley Fool recommends Apple, Coca-Cola, and Monster Beverage. The Motley Fool owns shares of Apple and Monster Beverage. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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