For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like United-Guardian (NASDAQ:UG). 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.
How Quickly Is United-Guardian 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). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, United-Guardian has grown EPS by 7.1% per year. While that sort of growth rate isn’t amazing, it does show the business is growing.
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). United-Guardian’s EBIT margins have fallen over the last twelve months, but the flat revenue sends a message of stability. Does that sound particularly bullish? No, it does not.
Since United-Guardian is no giant, with a market capitalization of US$89m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are United-Guardian Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So we’re pleased to report that United-Guardian insiders own a meaningful share of the business. Actually, with 38% of the company to their names, insiders are profoundly invested in the business. I’m always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. In terms of absolute value, insiders have US$34m invested in the business, using the current share price. That’s nothing to sneeze at!
It’s good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations under US$200m, like United-Guardian, the median CEO pay is around US$474k.
United-Guardian offered total compensation worth US$422k to its CEO in the year to December 2018. 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. It can also be a sign of a culture of integrity, in a broader sense.
Does United-Guardian Deserve A Spot On Your Watchlist?
One important encouraging feature of United-Guardian is that it is growing profits. The fact that EPS is growing is a genuine positive for United-Guardian, 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. Once you’ve identified a business you like, the next step is to consider what you think it’s worth. And right now is your chance to view our exclusive discounted cashflow valuation of United-Guardian. You might benefit from giving it a glance today.
Although United-Guardian 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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