Stock Analysis

I Ran A Stock Scan For Earnings Growth And Sturm Ruger (NYSE:RGR) Passed With Ease

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NYSE:RGR
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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. 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 Sturm Ruger (NYSE:RGR). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Sturm Ruger

How Quickly Is Sturm Ruger Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. As a tree reaches steadily for the sky, Sturm Ruger's EPS has grown 21% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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). The good news is that Sturm Ruger is growing revenues, and EBIT margins improved by 11.4 percentage points to 21%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

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

earnings-and-revenue-history
NYSE:RGR Earnings and Revenue History March 17th 2021

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

Are Sturm Ruger 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 Sturm Ruger insiders have a significant amount of capital invested in the stock. Indeed, they hold US$17m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 1.4% 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. Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between US$1.0b and US$3.2b, like Sturm Ruger, the median CEO pay is around US$3.5m.

The Sturm Ruger CEO received US$1.9m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Does Sturm Ruger Deserve A Spot On Your Watchlist?

You can't deny that Sturm Ruger has grown its earnings per share at a very impressive rate. That's attractive. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. This may only be a fast rundown, but the takeaway for me is that Sturm Ruger is worth keeping an eye on. Even so, be aware that Sturm Ruger is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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