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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 Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
So if you’re like me, you might be more interested in profitable, growing companies, like ARB (ASX:ARB). While profit is not necessarily a social good, it’s easy to admire a business than can consistently produce it. 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 ARB
How Quickly Is ARB Increasing Earnings Per Share?
As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. We can see that in the last three years ARB grew its EPS by 5.2% per year. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). ARB maintained stable EBIT margins over the last year, all while growing revenue 8.7% to AU$437m. That’s a real positive.
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.
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 ARB’s future profits.
Are ARB Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
The good news for ARB shareholders is that no insiders reported selling shares in the last year. With that in mind, it’s heartening that Andrew Stott, the Independent Non-Executive Director of the company, paid AU$51k for shares at around AU$17.05 each.
Along with the insider buying, another encouraging sign for ARB is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth AU$180m. That equates to 12% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.
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, Andrew Brown is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like ARB with market caps between AU$571m and AU$2.3b is about AU$1.5m.
The CEO of ARB only received AU$391k in total compensation for the year ending June 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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 a culture of integrity, in a broader sense.
Is ARB Worth Keeping An Eye On?
One important encouraging feature of ARB is that it is growing profits. On top of that, we’ve seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist – and arguably a research priority. While we’ve looked at the quality of the earnings, we haven’t yet done any work to value the stock. So if you like to buy cheap, you may want to check if ARB is trading on a high P/E or a low P/E, relative to its industry.
As a growth investor I do like to see insider buying. But ARB 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
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.