Here's Why I Think California Water Service Group (NYSE:CWT) Might Deserve Your Attention Today

By
Simply Wall St
Published
January 02, 2022
NYSE:CWT
Source: Shutterstock

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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In contrast to all that, I prefer to spend time on companies like California Water Service Group (NYSE:CWT), which has not only revenues, but also profits. 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.

Check out our latest analysis for California Water Service Group

How Quickly Is California Water Service Group Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. We can see that in the last three years California Water Service Group grew its EPS by 14% per year. That's a good rate of growth, if it can be sustained.

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). While we note California Water Service Group's EBIT margins were flat over the last year, revenue grew by a solid 3.2% to US$807m. That's a real positive.

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:CWT Earnings and Revenue History January 2nd 2022

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for California Water Service Group's future profits.

Are California Water Service Group 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. As a result, I'm encouraged by the fact that insiders own California Water Service Group shares worth a considerable sum. To be specific, they have US$34m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.9% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

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. I discovered that the median total compensation for the CEOs of companies like California Water Service Group with market caps between US$2.0b and US$6.4b is about US$5.1m.

California Water Service Group offered total compensation worth US$3.8m to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.

Does California Water Service Group Deserve A Spot On Your Watchlist?

One positive for California Water Service Group is that it is growing EPS. That's nice to see. Earnings growth might be the main game for California Water Service Group, but the fun does not stop there. Boasting both modest CEO pay and considerable insider ownership, I'd argue this one is worthy of the watchlist, at least. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with California Water Service Group (at least 1 which makes us a bit uncomfortable) , and understanding these should be part of your investment process.

Although California Water Service Group 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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