Here's Why We Think East West Bancorp (NASDAQ:EWBC) Is Well Worth Watching

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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In contrast to all that, I prefer to spend time on companies like East West Bancorp (NASDAQ:EWBC), which has not only revenues, but also profits. 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. 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 East West Bancorp

East West Bancorp's Earnings Per Share Are Growing.

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, East West Bancorp has grown EPS by 10% per year. That growth rate is fairly good, assuming the company can keep it up.

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 East West Bancorp's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note East West Bancorp's EBIT margins were flat over the last year, revenue grew by a solid 16% to US$1.6b. That's progress.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

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

Are East West Bancorp Insiders Aligned With All Shareholders?

Since East West Bancorp has a market capitalization of US$10b, we wouldn't expect insiders to hold a large percentage of shares. But we do take comfort from the fact that they are investors in the company. Given insiders own a small fortune of shares, currently valued at US$81m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for 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 over US$8.0b, like East West Bancorp, the median CEO pay is around US$11m.

The East West Bancorp CEO received US$6.9m in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Is East West Bancorp Worth Keeping An Eye On?

As I already mentioned, East West Bancorp is a growing business, which is what I like to see. The fact that EPS is growing is a genuine positive for East West Bancorp, 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. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with East West Bancorp , and understanding this should be part of your investment process.

Although East West Bancorp 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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