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. 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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in a2 Milk (NZSE:ATM). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
a2 Milk's Improving Profits
In the last three years a2 Milk's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Like a wedge-tailed eagle on the wind, a2 Milk's EPS soared from NZ$0.40 to NZ$0.53, in just one year. That's a impressive gain of 31%.
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 a2 Milk's EBIT margins were flat over the last year, revenue grew by a solid 33% to NZ$1.7b. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for a2 Milk?
Are a2 Milk Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a NZ$11b company like a2 Milk. But we do take comfort from the fact that they are investors in the company. To be specific, they have NZ$35m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 0.3% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like a2 Milk with market caps between AU$5.5b and AU$16b is about AU$1.9m.
The a2 Milk CEO received AU$966k in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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 a2 Milk Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about a2 Milk's strong EPS growth. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that a2 Milk is worth keeping an eye on. You should always think about risks though. Case in point, we've spotted 2 warning signs for a2 Milk you should be aware of.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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