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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Austal (ASX:ASB). 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.
See our latest analysis for Austal
How Fast Is Austal Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. I, for one, am blown away by the fact that Austal has grown EPS by 49% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.
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. Unfortunately, Austal's revenue dropped 7.4% last year, but the silver lining is that EBIT margins improved from 4.8% to 7.2%. That's not ideal.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future Austal EPS 100% free.
Are Austal Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
The good news for Austal shareholders is that no insiders reported selling shares in the last year. So it's definitely nice that Independent Non-Executive Director Charles Roland Everist bought AU$8.3k worth of shares at an average price of around AU$2.77.
The good news, alongside the insider buying, for Austal bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold AU$18m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 2.4% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Does Austal Deserve A Spot On Your Watchlist?
Austal's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest Austal belongs on the top of your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Austal (at least 1 which makes us a bit uncomfortable) , and understanding these should be part of your investment process.
The good news is that Austal is not the only growth stock with insider buying. Here's a list of them... 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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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About ASX:ASB
Austal
Engages in the design, manufacture, and support of vessels for commercial and defense customers worldwide.
Reasonable growth potential with adequate balance sheet.
