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 as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
So if you're like me, you might be more interested in profitable, growing companies, like Johnson Matthey (LON:JMAT). 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.
Johnson Matthey's Earnings Per Share Are Growing.
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. Johnson Matthey managed to grow EPS by 9.0% per year, over three years. That's a pretty good rate, if the company can sustain it.
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. While we note Johnson Matthey's EBIT margins were flat over the last year, revenue grew by a solid 4.6% to UK£11b. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Johnson Matthey.
Are Johnson Matthey 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
We haven't seen any insiders selling Johnson Matthey shares, in the last year. So it's definitely nice that Non-Executive Director Christopher Mottershead bought UK£25k worth of shares at an average price of around UK£26.05.
Is Johnson Matthey Worth Keeping An Eye On?
One positive for Johnson Matthey is that it is growing EPS. That's nice to see. While some companies are struggling to grow EPS, Johnson Matthey seems free from that morose affliction. The icing on the cake is that an insider bought shares during the year, which inclines me to put this one on a watchlist. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if Johnson Matthey is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Johnson Matthey, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.