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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Hawthorn Bancshares (NASDAQ:HWBK). 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Quickly Is Hawthorn Bancshares Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. Hawthorn Bancshares managed to grow EPS by 17% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.
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. I note that Hawthorn Bancshares’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 Hawthorn Bancshares’s EBIT margins were flat over the last year, revenue grew by a solid 10% to US$56m. That’s a real positive.
The chart below shows how the company’s bottom and top lines have progressed over time. For finer detail, click on the image.
Hawthorn Bancshares isn’t a huge company, given its market capitalization of US$162m. That makes it extra important to check on its balance sheet strength.
Are Hawthorn Bancshares Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That’s because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
We note that Hawthorn Bancshares insiders spent US$106k on stock, over the last year; in contrast, we didn’t see any selling. That’s nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Director Gus Wetzel who made the biggest single purchase, worth US$23k, paying US$23.31 per share.
I do like that insiders have been buying shares in Hawthorn Bancshares, but there is more evidence of shareholder friendly management. I refer to the very reasonable level of CEO pay. I discovered that the median total compensation for the CEOs of companies like Hawthorn Bancshares with market caps between US$100m and US$400m is about US$1.2m.
Hawthorn Bancshares offered total compensation worth US$646k to its CEO in the year to December 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 a culture of integrity, in a broader sense.
Does Hawthorn Bancshares Deserve A Spot On Your Watchlist?
One important encouraging feature of Hawthorn Bancshares is that it is growing profits. And that’s not all, folks. We’ve also seen insiders buying stock, and noted modest executive pay. If that doesn’t automatically earn it a spot on your watchlist then I’d posit it warrants a closer look at the very 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 Hawthorn Bancshares is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Hawthorn Bancshares, you’ll probably love this free list of growing companies that insiders are buying.
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 email@example.com. 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.