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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like VMware (NYSE:VMW). 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. 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.
How Fast Is VMware Growing?
As one of my mentors once told me, share price follows earnings per share (EPS). It’s no surprise, then, that I like to invest in companies with EPS growth. It certainly is nice to see that VMware has managed to grow EPS by 27% per year over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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. VMware maintained stable EBIT margins over the last year, all while growing revenue 14% to US$9.2b. That’s a real positive.
You don’t drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for VMware’s future profits.
Are VMware Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$63b company like VMware. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$192m. This suggests to me that leadership will be very mindful of shareholders’ interests when making decisions!
Should You Add VMware To Your Watchlist?
You can’t deny that VMware has grown its earnings per share at a very impressive rate. That’s attractive. Further, the high level of insider buying impresses me, and suggests that I’m not the only one who appreciates the EPS growth. Fast growth and confident insiders should be enough to warrant further research. So the answer is that I do think this is a good stock to follow along with. Once you’ve identified a business you like, the next step is to consider what you think it’s worth. And right now is your chance to view our exclusive discounted cashflow valuation of VMware. You might benefit from giving it a glance today.
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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