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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 . found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Parkland Fuel (TSE:PKI). 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.
How Fast Is Parkland Fuel Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It’s no surprise, then, that I like to invest in companies with EPS growth. Who among us would not applaud Parkland Fuel’s stratospheric annual EPS growth of 51%, compound, over the last three years? That sort of growth never lasts long, but like a shooting star it is well worth watching 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. While we note Parkland Fuel’s EBIT margins were flat over the last year, revenue grew by a solid 51% to CA$14b. 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 Parkland Fuel’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Parkland Fuel 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Parkland Fuel insiders both bought and sold shares over the last twelve months, but they did end up spending CA$43k more on stock than they received from selling it. So, on balance, insider transaction are mildly encouraging.
Along with the insider buying, another encouraging sign for Parkland Fuel is that insiders, as a group, have a considerable shareholding. Indeed, they hold CA$52m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.9%, 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, Bob Espey is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Parkland Fuel with market caps between CA$2.7b and CA$8.6b is about CA$4.1m.
Parkland Fuel offered total compensation worth CA$2.4m to its CEO in the year to December 2017. That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.
Is Parkland Fuel Worth Keeping An Eye On?
Parkland Fuel’s earnings per share growth has been so hot recently that thinking about it is making me blush. The company can also boast of insider buying, and reasonable remuneration for the CEO. The strong EPS growth suggests Parkland Fuel may be at an inflection point. If so, then it the potential for further gains probably merit 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 Parkland Fuel.
The good news is that Parkland Fuel is not the only growth stock with insider buying. Here’s a 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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.