Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.
In contrast to all that, I prefer to spend time on companies like ConocoPhillips (NYSE:COP), which has not only revenues, but also profits. Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
ConocoPhillips’s Improving Profits
Over the last three years, ConocoPhillips has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don’t think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a wedge-tailed eagle on the wind, ConocoPhillips’s EPS soared from US$3.81 to US$6.24, in just one year. That’s a impressive gain of 64%.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Not all of ConocoPhillips’s revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I’ve used might not be the best representation of the underlying business. ConocoPhillips shareholders can take confidence from the fact that EBIT margins are up from 20% to 25%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
Fortunately, we’ve got access to analyst forecasts of ConocoPhillips’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are ConocoPhillips Insiders Aligned With All Shareholders?
Since ConocoPhillips has a market capitalization of US$64b, we wouldn’t expect insiders to hold a large percentage of shares. But we are reassured by the fact they have invested in the company. Given insiders own a small fortune of shares, currently valued at US$57m, they have plenty of motivation to push the business to succeed. That’s certainly enough to make me think that management will be very focussed on long term growth.
Is ConocoPhillips Worth Keeping An Eye On?
You can’t deny that ConocoPhillips has grown its earnings per share at a very impressive rate. That’s attractive. I think that EPS growth is something to boast of, and it doesn’t surprise me that insiders are holding on to a considerable chunk of shares. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of ConocoPhillips.
Although ConocoPhillips certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you’re looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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