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- NYSE:RH
Here's Why We Think RH (NYSE:RH) Is Well Worth Watching
The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. 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. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like RH (NYSE:RH). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
See our latest analysis for RH
RH's Earnings Per Share Are Growing
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. To the delight of shareholders, RH has achieved impressive annual EPS growth of 54%, compound, over the last three years. That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.
Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. It was a year of stability for RH as both revenue and EBIT margins remained have been flat over the past year. That's not bad, but it doesn't point to ongoing future growth, either.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for RH's future EPS 100% free.
Are RH Insiders Aligned With All Shareholders?
Owing to the size of RH, we wouldn't expect insiders to hold a significant proportion of the company. But thanks to their investment in the company, it's pleasing to see that there are still incentives to align their actions with the shareholders. We note that their impressive stake in the company is worth US$846m. That equates to 16% of the company, making insiders powerful and aligned with other shareholders. Looking very optimistic for investors.
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. The median total compensation for CEOs of companies similar in size to RH, with market caps between US$4.0b and US$12b, is around US$8.2m.
The RH CEO received US$4.5m in compensation for the year ending January 2022. That is actually below the median for CEO's of similarly sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives 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 RH Deserve A Spot On Your Watchlist?
RH's earnings per share growth have been climbing higher at an appreciable rate. The cherry on top is that insiders own a bucket-load of shares, and the CEO pay seems really quite reasonable. The strong EPS improvement suggests the businesses is humming along. RH certainly ticks a few boxes, so we think it's probably well worth further consideration. What about risks? Every company has them, and we've spotted 4 warning signs for RH (of which 2 are a bit unpleasant!) you should know about.
There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you 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.
What are the risks and opportunities for RH?
RH, together with its subsidiaries, operates as a retailer in the home furnishings and operates under RH Galleries and RH brand names in the District of Columbia and Canada, as well as Waterworks showrooms throughout the United States and the United Kingdom.
Rewards
Trading at 27.9% below our estimate of its fair value
Earnings grew by 10.2% over the past year
Risks
Earnings are forecast to decline by an average of 2.2% per year for the next 3 years
High level of non-cash earnings
Shareholders have been diluted in the past year
Significant insider selling over the past 3 months
Further research on
RH
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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.
About NYSE:RH
RH
RH, together with its subsidiaries, operates as a retailer in the home furnishings and operates under RH Galleries and RH brand names in the District of Columbia and Canada, as well as Waterworks showrooms throughout the United States and the United Kingdom.
Undervalued with adequate balance sheet.
