Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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 Utah Medical Products (NASDAQ:UTMD), which has not only revenues, but also profits. 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.
Utah Medical Products’s Earnings Per Share Are Growing.
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. Utah Medical Products managed to grow EPS by 10.0% per year, over three years. That’s a good rate of growth, if it can be sustained.
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. While Utah Medical Products’s EBIT margins are down, it’s not all bad news as revenues are, at least, stable. Does that sound particularly bullish? No, it does not.
While it’s always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Utah Medical Products’s balance sheet strength, before getting too excited.
Are Utah Medical Products Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that Utah Medical Products insiders have a significant amount of capital invested in the stock. To be specific, they have US$26m worth of shares. That’s a lot of money, and no small incentive to work hard. That amounts to 7.3% of the company, demonstrating a degree of high-level alignment with shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Utah Medical Products with market caps between US$200m and US$800m is about US$1.9m.
The Utah Medical Products CEO received total compensation of just US$501k in the year to December 2018. That’s clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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. I’d also argue reasonable pay levels attest to good decision making more generally.
Does Utah Medical Products Deserve A Spot On Your Watchlist?
As I already mentioned, Utah Medical Products is a growing business, which is what I like to see. The fact that EPS is growing is a genuine positive for Utah Medical Products, but the pretty picture gets better than that. Boasting both modest CEO pay and considerable insider ownership, I’d argue this one is worthy of the watchlist, at least. Now, you could try to make up your mind on Utah Medical Products by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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