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.
So if you’re like me, you might be more interested in profitable, growing companies, like First Bancorp (NASDAQ:FNLC). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.
First Bancorp’s Earnings Per Share Are Growing.
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. We can see that in the last three years First Bancorp grew its EPS by 13% per year. That’s a good rate of growth, if it can be sustained.
One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. I note that First Bancorp’s revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note First Bancorp’s EBIT margins were flat over the last year, revenue grew by a solid 5.7% to US$63m. That’s a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time.
Since First Bancorp is no giant, with a market capitalization of US$299m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are First Bancorp 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. As a result, I’m encouraged by the fact that insiders own First Bancorp shares worth a considerable sum. Indeed, they hold US$21m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 6.9% of the company; visible skin in the game.
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. For companies with market capitalizations between US$100m and US$400m, like First Bancorp, the median CEO pay is around US$1.2m.
The First Bancorp CEO received US$858k in compensation for the year ending December 2018. 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. I’d also argue reasonable pay levels attest to good decision making more generally.
Is First Bancorp Worth Keeping An Eye On?
One positive for First Bancorp is that it is growing EPS. That’s nice to see. Earnings growth might be the main game for First Bancorp, but the fun does not stop there. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. 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 First Bancorp.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.