Sept. 14 (Bloomberg) -- There are lots of ways to measure profitability. Many investors fixate on a company’s earnings growth, especially for one-year or five-year periods.

I have nothing against that measure -- well, wait a moment, I do. It is too sensitive to the starting point, making companies look unduly strong when they are coming off a bad year, or unfairly weak when the base year is an especially prosperous one.

There is no way investors will stop looking at earnings growth rates (nor would I want them to), but there are other measures that are helpful. One is the operating margin.

A company with operating profit of $100 million on revenue of $1 billion has a 10 percent operating margin. For this column I looked for companies that have a 20 percent operating margin or more, placing them among the top quarter of the 1,356 U.S. companies with a market value of $1 billion or more.

Then I looked for margin expansion, as measured by at least a 5 percent compound annual average widening in profit margins over the past five years. Only 6 percent of companies passed both tests.

Because of certain flukes in the formulas, these two steps can spit out false positives. Therefore, I also required a 10 percent return on stockholders’ equity -- another time-tested measure of profitability. Only 4 percent of the companies passed all three tests.

‘Obscene’ Profits

Perhaps my quest was subconsciously inspired by a remark money manager Louis Navellier made many years ago. Asked what he looks for in profit margins, he replied, “Obscene and growing.”

Navellier is primarily a growth investor, while I am devoted to value investing. That’s no problem: It’s always good to find a stock that has both growth and value characteristics.

Some of the fattest profit margins I found belong to Noble Corp., the third-largest U.S. offshore oil driller. The Sugar Land, Texas-based company had an operating margin of 55 percent last year.

I believe that oil drilling will be focused on deep water wells over the next 10 years. Accordingly, I like the entire offshore drilling group.

Noble recently resolved a dispute with Brazil’s Petroleo Brasileiro SA over late delivery of an offshore rig. Its relationship with the Brazilian oil powerhouse should serve it well over the next few years.

Yet Brazil is only a small part of Noble’s story. Of the $3.4 billion in revenue it booked last year, at least $300 million came from each of five different countries: Mexico, the U.S., Qatar, Nigeria and the Netherlands. Few companies are so diversified.

Record Earnings

Last year’s earnings of $5.79 a share were the best that Noble had achieved. This year looks to be better, with analysts estimating $6.14. At its current price at about $37, Noble is trading for less than six times the past four quarters’ earnings.

Turning from the oil patch to the realm of fast food, I found a 27 percent operating margin at the land of the golden arches, McDonald’s Corp.

The Oak Brook, Illinois-based hamburger chain has seen its margins expand by 7.8 percent per year, on average, the past five years.

What’s more, McDonald’s has managed to increase its earnings at a 31 percent average annual clip the past five years. Last year its return on equity was 30 percent. That’s richer than the Special Sauce on your Big Mac.

McDonald’s Growth

To be sure, McDonald’s stock isn’t particularly cheap, but its price of about $54 a share is 15 times earnings, which is acceptable. The company’s balance sheet is only average, with debt equal to 83 percent of equity as of June 30.

I don’t own McDonald’s shares because I generally prefer stocks that are smaller and more beaten up. I would nevertheless consider it a sensible purchase for a growth-oriented investor.

Less well known, and considerably cheaper, is Terra Industries Inc. Based in Sioux City, Iowa, Terra makes nitrogen fertilizer.

The company is caught up in a battle with rival CF Industries Holdings Inc. CF made a takeover offer for Terra last month, which Terra spurned.

CF responded by suing Terra and proposing its own slate of candidates for Terra’s board.

Terra stock rose from about $25 in early July to about $33 recently, partly in advance of the takeover offer and partly after it. Even after the spurt, the stock sells for only eight times earnings. The company boasts an operating margin of 27 percent.

No Tobacco

I don’t recommend tobacco stocks, even though their operating margins are terrific: 40 percent at Philip Morris International Inc., for example, and 28 percent for Reynolds American Inc. I believe that health concerns, lawsuits and heavy taxation will sap the companies’ profitability over the next five years.

Disclosure note: Personally and for clients, I have no long or short positions at this time in the stocks discussed in this week’s column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

Last Updated: September 13, 2009 21:00 EDT