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. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.
In contrast to all that, I prefer to spend time on companies like Brickworks (ASX:BKW), which has not only revenues, but also profits. 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 Brickworks 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 makes EPS growth an attractive quality for any company. Impressively, Brickworks has grown EPS by 26% per year, compound, in the last three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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. Brickworks maintained stable EBIT margins over the last year, all while growing revenue 12% to AU$886m. That’s progress.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Brickworks.
Are Brickworks 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. That’s because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
While Brickworks insiders did net -AU$1.4m selling stock over the last year, they invested AU$1.9m, a much higher figure. You could argue that level of buying implies genuine confidence in the business. It is also worth noting that it was MD & Executive Director Lindsay Partridge who made the biggest single purchase, worth AU$915k, paying AU$16.92 per share.
The good news, alongside the insider buying, for Brickworks bulls is that insiders (collectively) have a meaningful investment in the stock. With a whopping AU$97m worth of shares as a group, insiders have plenty riding on the company’s success. This should keep them focused on creating long term value for shareholders.
Should You Add Brickworks To Your Watchlist?
You can’t deny that Brickworks has grown its earnings per share at a very impressive rate. That’s attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So it’s fair to say I think this stock may well deserve a spot on your watchlist. 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 Brickworks.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Brickworks, you’ll probably love this free list of growing companies that insiders are buying.
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.