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. 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 Fonterra Co-operative Group (NZSE:FCG). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Fast Is Fonterra Co-operative Group Growing Its Earnings Per Share?
Over the last three years, Fonterra Co-operative Group has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. As a result, I'll zoom in on growth over the last year, instead. Fonterra Co-operative Group boosted its trailing twelve month EPS from NZ$0.29 to NZ$0.32, in the last year. That's a 12% gain; respectable growth in the broader scheme of things.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. It seems Fonterra Co-operative Group is pretty stable, since revenue and EBIT margins are pretty flat year on year. That's not a major concern but nor does it point to the long term growth we like to see.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Fonterra Co-operative Group's balance sheet strength, before getting too excited.
Are Fonterra Co-operative Group Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Despite -NZ$30k worth of sales, Fonterra Co-operative Group insiders have overwhelmingly been buying the stock, spending NZ$437k on purchases in the last twelve months. On balance, to me, this signals their optimism. It is also worth noting that it was Director Brent Goldsack who made the biggest single purchase, worth NZ$220k, paying NZ$4.04 per share.
Is Fonterra Co-operative Group Worth Keeping An Eye On?
One important encouraging feature of Fonterra Co-operative Group is that it is growing profits. Not every business can grow its EPS, but Fonterra Co-operative Group certainly can. The cherry on top is the insider share purchases, which provide an extra impetus to keep and eye on this stock, at the very least. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Fonterra Co-operative Group , and understanding these should be part of your investment process.
As a growth investor I do like to see insider buying. But Fonterra Co-operative Group 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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