Here's Why I Think Data#3 (ASX:DTL) Might Deserve Your Attention Today

By
Simply Wall St
Published
November 25, 2021
ASX:DTL
Source: Shutterstock

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.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Data#3 (ASX:DTL). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

Check out our latest analysis for Data#3

How Quickly Is Data#3 Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. As a tree reaches steadily for the sky, Data#3's EPS has grown 22% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

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). While we note Data#3's EBIT margins were flat over the last year, revenue grew by a solid 20% to AU$2.0b. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

earnings-and-revenue-history
ASX:DTL Earnings and Revenue History November 25th 2021

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 Data#3 EPS 100% free.

Are Data#3 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. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

We note that Data#3 insiders spent AU$198k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic. We also note that it was the Independent Non-Executive Chairman, Richard Anderson, who made the biggest single acquisition, paying AU$50k for shares at about AU$5.00 each.

On top of the insider buying, it's good to see that Data#3 insiders have a valuable investment in the business. To be specific, they have AU$34m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 3.9% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

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, Laurence Baynham is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between AU$556m and AU$2.2b, like Data#3, the median CEO pay is around AU$1.4m.

Data#3 offered total compensation worth AU$1.0m to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Does Data#3 Deserve A Spot On Your Watchlist?

You can't deny that Data#3 has grown its earnings per share at a very impressive rate. That's attractive. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So it's fair to say I think this stock may well deserve a spot on your watchlist. Before you take the next step you should know about the 1 warning sign for Data#3 that we have uncovered.

The good news is that Data#3 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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