An article in the September 21 edition of the National Post suggested that a 1% increase in a company's pricing translates into a 12.5% increase in profits without the need for additional volume or cost savings. Industrial company Parker Hannafin (NYSE:PH) addressed its pricing policies back in 2002. The results were impressive; it grew net income from $130 million in 2002 to $949 million in 2008. That's six straight years of profitable growth and all because of pricing.

IN PICTURES: 5 Tips To Reading The Balance Sheet

So how do you find other companies who've used pricing increases to their advantage? The quickest method is to screen for companies who've grown revenues an average of 14% annually over the past five years. My screen produced 1,121 stocks. To narrow it further, I'll use consumer discretionary stocks, which reduces the field to 72. The winners are those companies increasing revenues and gross margins in each of the last five years.

Then There Were Seven
The education industry was the big winner with four companies making the cut out of seven consumer discretionary stocks. Other industries represented include gaming, apparel and audio/video products. While the past five years have been good to all seven companies, potential investors want to know about the next five and beyond. With this in mind, I'll try to handicap all seven and the likelihood of each duplicating its past success.

Company Revenue

Latest Fiscal Year

Revenue

Five Years Ago

Gross Margin

Latest Fiscal Year

Gross Margin

Five Years Ago

WMS Industries (NYSE:WMS) $765M $388M 64.0% 50.5%
True Religion Brand Jeans (Nasdaq:TRLG) $311M $28M 62.9% 47.5%
Dolby Laboratories (NYSE:DLB) $720M $289M 91.0% 68.3%
Strayer Education (Nasdaq:STRA) $512M $183M 67.5% 65.1%
Capella Education (Nasdaq:CPLA) $335M $118M 59.6% 50.0%
DeVry (NYSE:DV) $1.92B $781M 56.9% 44.0%
ITT Educational Services (NYSE:ESI) $1.32B $618M 65.9% 51.6%

The Business of Education
While for-profit schools will always do well in an education-obsessed society, they will be severely tested in the next couple of years as the Obama administration introduces new rules meant to reduce the number of students who are heavily in debt and without gainful employment after completing their education. Devry CEO Daniel Hamburger feels the regulations will hurt access to education as the number of programs available is cut back and with it, the job growth that comes with more students taking classes.

For-profit schools account for 12% of post-secondary students in the U.S. but receive almost 23% of federal aid, which is a large part of their revenue. The new rules will require schools to prove they are preparing students for real jobs in order to qualify for this federal aid. As a result, Career Education (Nasdaq:CECO) sees annual revenue growth of 8-10% in each of the next five years compared to 15% in 2010.

The four education companies listed above averaged over 20% annual growth the last five years. In the future, I'd expect this to drop by half. Whether they can continue to improve gross and operating margins despite regulatory changes is the million-dollar question. It is by far the biggest risk facing investors at this point. With an uncertain future, an education ETF would be an ideal vehicle to lower your risk. Unfortunately, as far as I'm aware, there isn't one.

Best of the Rest
If you look at the trailing twelve-month margins for True Religion, WMS Industries and Dolby Laboratories, only WMS has positive growth. True Religion's gross margins are still strong but operating margins are lower from new store opening expenses. As for Dolby, its fourth quarter ends at the end of September and management are calling for an 85% gross margin, 600 basis points lower than in 2009.

That's likely to continue to decline in the future, and here's why. In its 2010 third quarter, licensing revenue was 74% of overall sales compared to 83% in the same quarter last year. Licensing gross margins are 98% - pure profit. At the same time, product revenues went from 13% of overall sales to 23% with gross margins of 56%. The more Dolby sells actual products, the less money it'll make from every dollar of revenue. That happens to every licensing business that transitions into actual production. Dolby's a great company, but don't expect the margins to keep pace with the past.

This leads me to WMS Industries. Although the company's annual revenue guidance for 2011 of $830 million to $850 million is lower than the analysts' estimate of $852 million, its future in gaming is bright. Its new products have been well received, it continues to invest in research and development ($106 million in fiscal 2010) and operating margins in 2011 are projected to be at least 60 basis points higher than in 2010. I like its chances.

The Bottom Line
Of the seven companies highlighted, WMS Industries is my pick as the likeliest candidate to continue growing revenues and margins. (To learn more, see The Bottom Line On Margins.)

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