For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and 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 Schaffer (ASX:SFC). 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.
How Fast Is Schaffer 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. It’s no surprise, then, that I like to invest in companies with EPS growth. I, for one, am blown away by the fact that Schaffer has grown EPS by 45% per year, over the last three years. That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. While revenue is looking a bit flat, the good news is EBIT margins improved by 5.4 percentage points to 20%, in the last twelve months. That’s a real positive.
The chart below shows how the company’s bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
Since Schaffer is no giant, with a market capitalization of AU$181m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Schaffer Insiders Aligned With All Shareholders?
Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So as you can imagine, the fact that Schaffer insiders own a significant number of shares certainly appeals to me. In fact, hey own 52% of the company, so they will share in the same delights and challenged experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term – something I like to see. With that sort of holding, insiders have about AU$94m riding on the stock, at current prices. That should be more than enough to keep them focussed on creating shareholder value!
Is Schaffer Worth Keeping An Eye On?
Schaffer’s earnings per share have taken off like a rocket aimed right at the moon. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it’s worth considering Schaffer for a spot on your watchlist. Of course, just because Schaffer is growing does not mean it is undervalued. If you’re wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
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
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 email@example.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.