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.
So if you’re like me, you might be more interested in profitable, growing companies, like Escalade (NASDAQ:ESCA). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. 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 Escalade Increasing Earnings Per Share?
As one of my mentors once told me, share price follows earnings per share (EPS). It’s no surprise, then, that I like to invest in companies with EPS growth. Impressively, Escalade has grown EPS by 25% per year, compound, in the last three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be smiling.
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. It seems Escalade is pretty stable, since revenue and EBIT margins are pretty flat year on year. That’s not a major concern but nor does it point to the long term growth we like to see.
Since Escalade is no giant, with a market capitalization of US$169m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Escalade Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Like a sturdy phalanx Escalade insiders have stood united by refusing to sell shares over the last year. But my excitement comes from the US$59k that Independent Director Richard Baalmann spent buying shares (at an average price of about US$11.86).
Along with the insider buying, another encouraging sign for Escalade is that insiders, as a group, have a considerable shareholding. Indeed, they hold US$45m worth of its stock. That’s a lot of money, and no small incentive to work hard. That amounts to 27% of the company, demonstrating a degree of high-level alignment with shareholders.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That’s because on our analysis the CEO, Dave Fetherman, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Escalade with market caps between US$100m and US$400m is about US$1.2m.
Escalade offered total compensation worth US$773k 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 good governance, more generally.
Does Escalade Deserve A Spot On Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Escalade’s strong EPS growth. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So it’s fair to say I think this stock may well deserve a spot on your watchlist. Of course, just because Escalade is growing does not mean it is undervalued. If you’re wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
The good news is that Escalade is not the only growth stock with insider buying. Here’s a list of them… with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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