I Ran A Stock Scan For Earnings Growth And Pine Care Group (HKG:1989) Passed With Ease

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. 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 the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Pine Care Group (HKG:1989). 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. 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.

View our latest analysis for Pine Care Group

Pine Care Group's Earnings Per Share Are Growing.

As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. It certainly is nice to see that Pine Care Group has managed to grow EPS by 19% per year over three years. This has no doubt fuelled the optimism that sees the stock trading on a high multiple of earnings.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). The good news is that Pine Care Group is growing revenues, and EBIT margins improved by 4.8 percentage points to 14%, over the last year. That's great to see, on both counts.

In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.

Since Pine Care Group is no giant, with a market capitalization of HK$1.3b, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Pine Care Group 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. 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.

We do note that, in the last year, insiders sold -HK$222m worth of shares. But that's far less than the HK$1.4b insiders spend purchasing stock. I find this encouraging because it suggests they are optimistic about the Pine Care Group's future. We also note that it was the Executive Chairman, Yiu Sing Tang, who made the biggest single acquisition, paying HK$449m for shares at about HK$1.65 each.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Pine Care Group insiders own more than a third of the company. Indeed, with a collective holding of 67%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. With that sort of holding, insiders have about HK$880m riding on the stock, at current prices. That should be more than enough to keep them focussed on creating shareholder value!

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, Yip Keung Chan is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between HK$775m and HK$3.1b, like Pine Care Group, the median CEO pay is around HK$2.3m.

The Pine Care Group CEO received total compensation of just HK$738k in the year to . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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 good governance, more generally.

Is Pine Care Group Worth Keeping An Eye On?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Pine Care Group'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 I do think this is one stock worth watching. Before you take the next step you should know about the 3 warning signs for Pine Care Group (2 are a bit concerning!) that we have uncovered.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Pine Care Group, 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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