Stock Analysis

Is Now The Time To Put City Holding (NASDAQ:CHCO) On Your Watchlist?

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NasdaqGS:CHCO
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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. 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 City Holding (NASDAQ:CHCO). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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 City Holding

How Fast Is City Holding Growing?

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. Over the last three years, City Holding has grown EPS by 8.0% per year. That's a pretty good rate, if the company can sustain it.

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). I note that City Holding's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. City Holding maintained stable EBIT margins over the last year, all while growing revenue 6.7% to US$230m. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

earnings-and-revenue-history
NasdaqGS:CHCO Earnings and Revenue History May 5th 2022

Fortunately, we've got access to analyst forecasts of City Holding's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are City Holding Insiders Aligned With All Shareholders?

It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that City Holding insiders have a significant amount of capital invested in the stock. To be specific, they have US$29m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 2.5% 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. For companies with market capitalizations between US$400m and US$1.6b, like City Holding, the median CEO pay is around US$3.5m.

The CEO of City Holding only received US$1.5m in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Does City Holding Deserve A Spot On Your Watchlist?

As I already mentioned, City Holding is a growing business, which is what I like to see. Earnings growth might be the main game for City Holding, but the fun does not stop there. Boasting both modest CEO pay and considerable insider ownership, I'd argue this one is worthy of the watchlist, at least. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if City Holding is trading on a high P/E or a low P/E, relative to 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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