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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
So if you’re like me, you might be more interested in profitable, growing companies, like Fisher & Paykel Healthcare (NZSE:FPH). 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.
How Quickly Is Fisher & Paykel Healthcare Increasing Earnings Per Share?
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. Fisher & Paykel Healthcare managed to grow EPS by 17% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. The good news is that Fisher & Paykel Healthcare is growing revenues, and EBIT margins improved by 2.1 percentage points to 28%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Fisher & Paykel Healthcare.
Are Fisher & Paykel Healthcare Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a NZ$9.2b company like Fisher & Paykel Healthcare. But we are reassured by the fact they have invested in the company. Indeed, they hold NZ$38m worth of its stock. That’s a lot of money, and no small incentive to work hard. Even though that’s only about 0.4% 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 Fisher & Paykel Healthcare with market caps between NZ$6.1b and NZ$18b is about NZ$4.4m.
The Fisher & Paykel Healthcare CEO received NZ$2.3m in compensation for the year ending March 2018. 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.
Should You Add Fisher & Paykel Healthcare To Your Watchlist?
One important encouraging feature of Fisher & Paykel Healthcare is that it is growing profits. The fact that EPS is growing is a genuine positive for Fisher & Paykel Healthcare, but the pretty picture gets better than that. Boasting both modest CEO pay and considerable insider ownership, I’d argue this one is worthy of the watchlist, at least. Now, you could try to make up your mind on Fisher & Paykel Healthcare by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
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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