Does Fortescue Metals Group (ASX:FMG) Deserve A Spot On Your Watchlist?

It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

So if you’re like me, you might be more interested in profitable, growing companies, like Fortescue Metals Group (ASX:FMG). Now, I’m not saying that the stock is necessarily undervalued today; but I can’t shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Fortescue Metals Group

Fortescue Metals Group’s Earnings Per Share Are Growing.

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. I, for one, am blown away by the fact that Fortescue Metals Group has grown EPS by 39% per year, over the last three years. While that sort of growth rate isn’t sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. The good news is that Fortescue Metals Group is growing revenues, and EBIT margins improved by 30.8 percentage points to 56%, over the last year. That’s great to see, on both counts.

You can take a look at the company’s revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

ASX:FMG Income Statement May 18th 2020
ASX:FMG Income Statement May 18th 2020

While we live in the present moment at all times, there’s no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Fortescue Metals Group?

Are Fortescue Metals Group Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.

It’s a pleasure to note that insiders spent US$243m buying Fortescue Metals Group shares, over the last year, without reporting any share sales whatsoever. As if for a flower bud approaching bloom, I become an expectant observer, anticipating with hope, that something splendid is coming. We also note that it was the Founder & Chairman of the Board, John Andrew Forrest, who made the biggest single acquisition, paying AU$243m for shares at about AU$10.98 each.

Along with the insider buying, another encouraging sign for Fortescue Metals Group is that insiders, as a group, have a considerable shareholding. With a whopping US$126m worth of shares as a group, insiders have plenty riding on the company’s success. This should keep them focused on creating long term value for shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Elizabeth Gaines is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over AU$12b, like Fortescue Metals Group, the median CEO pay is around AU$6.3m.

The Fortescue Metals Group CEO received AU$5.0m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn’t a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Is Fortescue Metals Group Worth Keeping An Eye On?

Fortescue Metals Group’s earnings per share have taken off like a rocket aimed right at the moon. What’s more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I’d suggest Fortescue Metals Group belongs on the top of your watchlist. You should always think about risks though. Case in point, we’ve spotted 3 warning signs for Fortescue Metals Group you should be aware of, and 1 of them can’t be ignored.

As a growth investor I do like to see insider buying. But Fortescue Metals Group isn’t the only one. You can see a a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.