Does Koninklijke KPN (AMS:KPN) Deserve A Spot On Your Watchlist?

By
Simply Wall St
Published
January 28, 2021
ENXTAM:KPN

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. 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 Koninklijke KPN (AMS:KPN). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. 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 Koninklijke KPN

How Quickly Is Koninklijke KPN Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. It certainly is nice to see that Koninklijke KPN has managed to grow EPS by 24% per year over 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 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). While Koninklijke KPN may have maintained EBIT margins over the last year, revenue has fallen. And that does make me a little more cautious of the stock.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

earnings-and-revenue-history
ENXTAM:KPN Earnings and Revenue History January 28th 2021

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Koninklijke KPN's forecast profits?

Are Koninklijke KPN Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. 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.

It's good to see Koninklijke KPN insiders walking the walk, by spending €571k on shares in just twelve months. When you contrast that with the complete lack of sales, it's easy for shareholders to brim with joyful expectancy. It is also worth noting that it was Chairman of Management Board & CEO Joost Farwerck who made the biggest single purchase, worth €124k, paying €2.48 per share.

It's reassuring that Koninklijke KPN insiders are buying the stock, but that's not the only reason to think management are fair to shareholders. Specifically, the CEO is paid quite reasonably for a company of this size. I discovered that the median total compensation for the CEOs of companies like Koninklijke KPN, with market caps over €6.6b, is about €3.6m.

Koninklijke KPN offered total compensation worth €1.9m to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. I'd also argue reasonable pay levels attest to good decision making more generally.

Should You Add Koninklijke KPN To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Koninklijke KPN's strong EPS growth. But wait, it gets better. We have seen insider buying and the executive pay seems on the modest side of things. On balance the message seems to be that this stock is worth looking at, at least for a while. You should always think about risks though. Case in point, we've spotted 3 warning signs for Koninklijke KPN you should be aware of, and 1 of them is significant.

As a growth investor I do like to see insider buying. But Koninklijke KPN 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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