It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
So if you're like me, you might be more interested in profitable, growing companies, like Hibbett (NASDAQ:HIBB). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
Hibbett's Improving Profits
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked my socks off when I realized that Hibbett grew its EPS from US$1.93 to US$12.20, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.
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. The good news is that Hibbett is growing revenues, and EBIT margins improved by 8.0 percentage points to 15%, over the last year. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Fortunately, we've got access to analyst forecasts of Hibbett's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Hibbett 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. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Although we did see some insider selling (worth -US$7.2m) this was overshadowed by a mountain of buying, totalling US$18m in just one year. I find this encouraging because it suggests they are optimistic about the Hibbett's future. We also note that it was the , James Khezrie, who made the biggest single acquisition, paying US$17m for shares at about US$85.82 each.
Along with the insider buying, another encouraging sign for Hibbett is that insiders, as a group, have a considerable shareholding. Indeed, they hold US$19m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 1.7% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
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, Mike Longo, is paid less than the median for similar sized companies. For companies with market capitalizations between US$400m and US$1.6b, like Hibbett, the median CEO pay is around US$2.3m.
Hibbett offered total compensation worth US$1.9m to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. I'd also argue reasonable pay levels attest to good decision making more generally.
Is Hibbett Worth Keeping An Eye On?
Hibbett's earnings per share have taken off like a rocket aimed right at the moon. What's more insiders own a significant stake in the company and have been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Hibbett deserves timely attention. It's still necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Hibbett (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.
The good news is that Hibbett 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.
What are the risks and opportunities for Hibbett?
Trading at 79.6% below our estimate of its fair value
Earnings are forecast to grow 13.11% per year
High level of non-cash earnings
Profit margins (6.6%) are lower than last year (10.7%)
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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