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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. 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.
So if you’re like me, you might be more interested in profitable, growing companies, like Pembina Pipeline (TSE:PPL). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Fast Is Pembina Pipeline 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. Impressively, Pembina Pipeline has grown EPS by 34% per year, compound, in the last 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 take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. While we note Pembina Pipeline’s EBIT margins were flat over the last year, revenue grew by a solid 30% to CA$7.5b. That’s a real positive.
The chart below shows how the company’s bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Pembina Pipeline’s forecast profits?
Are Pembina Pipeline Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
Despite -CA$2.1m worth of sales, Pembina Pipeline insiders have overwhelmingly been buying the stock, spending CA$2.9m on purchases in the last twelve months. On balance, to me, this signals their optimism. We also note that it was the President, Michael Dilger, who made the biggest single acquisition, paying CA$2.5m for shares at about CA$49.22 each.
The good news, alongside the insider buying, for Pembina Pipeline bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have CA$61m worth of shares. That’s a lot of money, and no small incentive to work hard. Even though that’s only about 0.2% of the company, it’s enough money to indicate alignment between the leaders of the business and ordinary shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Mick Dilger is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over CA$11b, like Pembina Pipeline, the median CEO pay is around CA$8.8m.
The Pembina Pipeline CEO received CA$7.1m in compensation for the year ending December 2018. 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. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Pembina Pipeline To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Pembina Pipeline’s strong EPS growth. 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. Now, you could try to make up your mind on Pembina Pipeline by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Pembina Pipeline, 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 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.