Here's Why I Think Lincoln Pharmaceuticals (NSE:LINCOLN) Is An Interesting Stock

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. 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 Lincoln Pharmaceuticals (NSE:LINCOLN). 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.

See our latest analysis for Lincoln Pharmaceuticals

Lincoln Pharmaceuticals's Earnings Per Share Are Growing.

As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, Lincoln Pharmaceuticals's EPS has grown 23% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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 Lincoln Pharmaceuticals's EBIT margins were flat over the last year, revenue grew by a solid 9.2% to ₹4.2b. That's a real positive.

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

Since Lincoln Pharmaceuticals is no giant, with a market capitalization of ₹6.0b, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Lincoln Pharmaceuticals 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.

Although we did see some insider selling (worth -₹26m) this was overshadowed by a mountain of buying, totalling ₹173m in just one year. This makes me even more interested in Lincoln Pharmaceuticals because it suggests that those who understand the company best, are optimistic. Zooming in, we can see that the biggest insider purchase was by Whole Time Director Munjal Patel for ₹30m worth of shares, at about ₹218 per share.

On top of the insider buying, we can also see that Lincoln Pharmaceuticals insiders own a large chunk of the company. In fact, they own 49% of the shares, making insiders a very influential shareholder group. I'm always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. In terms of absolute value, insiders have ₹2.9b invested in the business, using the current share price. That's nothing to sneeze at!

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. That's because on our analysis the CEO, Mahendrabhai Patel, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Lincoln Pharmaceuticals with market caps under ₹15b is about ₹3.0m.

The CEO of Lincoln Pharmaceuticals was paid just ₹2.3m in total compensation for the year ending . You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. 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 good governance, more generally.

Is Lincoln Pharmaceuticals Worth Keeping An Eye On?

You can't deny that Lincoln Pharmaceuticals has grown its earnings per share at a very impressive rate. That's attractive. 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. What about risks? Every company has them, and we've spotted 3 warning signs for Lincoln Pharmaceuticals you should know about.

As a growth investor I do like to see insider buying. But Lincoln Pharmaceuticals isn't the only one. You can see a a free list of them here.

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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