Does Imperial Brands (LON:IMB) Deserve A Spot On Your Watchlist?

Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

So if you're like me, you might be more interested in profitable, growing companies, like Imperial Brands (LON:IMB). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Imperial Brands

Imperial Brands's Earnings Per Share Are Growing.

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, Imperial Brands has grown EPS by 32% 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.

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. Imperial Brands shareholders can take confidence from the fact that EBIT margins are up from 14% to 19%, and revenue is growing. That's great to see, on both counts.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Imperial Brands.

Are Imperial Brands 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. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

It's good to see Imperial Brands insiders walking the walk, by spending UK£271k on shares in just twelve months. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. It is also worth noting that it was Oliver Tant who made the biggest single purchase, worth UK£159k, paying UK£15.77 per share.

On top of the insider buying, it's good to see that Imperial Brands insiders have a valuable investment in the business. To be specific, they have UK£13m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.09% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Stefan Bomhard, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Imperial Brands, with market caps over UK£5.8b, is about UK£2.6m.

The CEO of Imperial Brands only received UK£1.1m in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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 Imperial Brands To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Imperial Brands's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. It is worth noting though that we have found 3 warning signs for Imperial Brands (1 makes us a bit uncomfortable!) that you need to take into consideration.

The good news is that Imperial Brands 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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