Here's Why We Think Morneau Shepell (TSE:MSI) Is Well Worth Watching

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 Morneau Shepell (TSE:MSI), 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

View our latest analysis for Morneau Shepell

Morneau Shepell's Improving Profits

Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So it's no surprise that some investors are more inclined to invest in profitable businesses. Like the last firework on New Year's Eve accelerating into the sky, Morneau Shepell's EPS shot from CA$0.30 to CA$0.69, over the last year. You don't see 131% year-on-year growth like that, very often.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While we note Morneau Shepell's EBIT margins were flat over the last year, revenue grew by a solid 16% to CA$977m. That's progress.

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

Fortunately, we've got access to analyst forecasts of Morneau Shepell's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Morneau Shepell Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

While Morneau Shepell insiders did net -CA$96k selling stock over the last year, they invested CA$696k, a much higher figure. On balance, to me, this signals their optimism. We also note that it was the President, Stephen Liptrap, who made the biggest single acquisition, paying CA$242k for shares at about CA$26.61 each.

Should You Add Morneau Shepell To Your Watchlist?

Morneau Shepell's earnings have taken off like any random crypto-currency did, back in 2017. If you're like me, you'll find it hard to ignore that sort of explosive EPS growth. And in fact, it could well signal a fundamental shift in the business economics. For me, this situation certainly piques my interest. What about risks? Every company has them, and we've spotted 3 warning signs for Morneau Shepell (of which 1 is a bit concerning!) you should know about.

The good news is that Morneau Shepell 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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