Does Richelieu Hardware (TSE:RCH) Deserve A Spot On Your Watchlist?

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

In contrast to all that, many investors prefer to focus on companies like Richelieu Hardware (TSE:RCH), which has not only revenues, but also profits. Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Richelieu Hardware with the means to add long-term value to shareholders.

Our analysis indicates that RCH is potentially undervalued!

Richelieu Hardware's Earnings Per Share Are Growing

If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Recognition must be given to the that Richelieu Hardware has grown EPS by 38% per year, over the last three years. That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.

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. Richelieu Hardware maintained stable EBIT margins over the last year, all while growing revenue 28% to CA$1.7b. That's a real positive.

You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.

While we live in the present moment, there's little doubt that the future matters most in the investment decision process. So why not check this interactive chart depicting future EPS estimates, for Richelieu Hardware?

Are Richelieu Hardware Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. 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.

Despite CA$150k worth of sales, Richelieu Hardware insiders have overwhelmingly been buying the stock, spending CA$511k on purchases in the last twelve months. This overall confidence in the company at current the valuation signals their optimism. Zooming in, we can see that the biggest insider purchase was by CEO, President & Executive Director Richard Lord for CA$111k worth of shares, at about CA$36.84 per share.

On top of the insider buying, it's good to see that Richelieu Hardware insiders have a valuable investment in the business. Notably, they have an enviable stake in the company, worth CA$149m. Investors will appreciate management having this amount of skin in the game as it shows their commitment to the company's future.

While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. The cherry on top is that the CEO, Richard Lord is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations between CA$1.4b and CA$4.4b, like Richelieu Hardware, the median CEO pay is around CA$3.1m.

The Richelieu Hardware CEO received CA$2.5m in compensation for the year ending November 2021. That comes in below the average for similar sized companies and seems pretty reasonable. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Is Richelieu Hardware Worth Keeping An Eye On?

Richelieu Hardware's earnings per share growth have been climbing higher at an appreciable rate. What's more, insiders own a significant stake in the company and have been buying more shares. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Richelieu Hardware belongs near the top of your watchlist. You should always think about risks though. Case in point, we've spotted 2 warning signs for Richelieu Hardware you should be aware of.

Keen growth investors love to see insider buying. Thankfully, Richelieu Hardware 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.