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 Commerce Bancshares (NASDAQ:CBSH). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. 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.
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How Fast Is Commerce Bancshares 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, Commerce Bancshares’s EPS has grown 18% 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. Not all of Commerce Bancshares’s revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I’ve used might not be the best representation of the underlying business. Commerce Bancshares maintained stable EBIT margins over the last year, all while growing revenue 6.6% to US$1.3b. That’s progress.
You can take a look at the company’s revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Fortunately, we’ve got access to analyst forecasts of Commerce Bancshares’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Commerce Bancshares Insiders Aligned With All Shareholders?
Since Commerce Bancshares has a market capitalization of US$6.5b, we wouldn’t expect insiders to hold a large percentage of shares. But we are reassured by the fact they have invested in the company. Notably, they have an enormous stake in the company, worth US$229m. This suggests to me that leadership will be very mindful of shareholders’ interests when making decisions!
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 Commerce Bancshares with market caps between US$4.0b and US$12b is about US$6.9m.
The Commerce Bancshares CEO received total compensation of just US$2.7m in the year to December 2018. That’s clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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 Commerce Bancshares Worth Keeping An Eye On?
You can’t deny that Commerce Bancshares has grown its earnings per share at a very impressive rate. That’s attractive. 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 Commerce Bancshares is worth keeping an eye on. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of Commerce Bancshares.
Although Commerce Bancshares certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you’re looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.