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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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
So if you're like me, you might be more interested in profitable, growing companies, like Enterprise Financial Services (NASDAQ:EFSC). While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. 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 Fast Is Enterprise Financial Services Growing?
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. It certainly is nice to see that Enterprise Financial Services has managed to grow EPS by 22% per year over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Not all of Enterprise Financial Services's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. While we note Enterprise Financial Services's EBIT margins were flat over the last year, revenue grew by a solid 8.9% to US$230m. That's progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
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 Enterprise Financial Services's future profits.
Are Enterprise Financial Services Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
While Enterprise Financial Services insiders did net -US$42.1k selling stock over the last year, they invested US$504k, a much higher figure. On balance, to me, this signals their optimism. Zooming in, we can see that the biggest insider purchase was by Chairman of the Board John Eulich for US$458k worth of shares, at about US$45.84 per share.
The good news, alongside the insider buying, for Enterprise Financial Services bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold US$25m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 2.3% 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. The cherry on top is that the CEO, Jim Lally is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between US$400m and US$1.6b, like Enterprise Financial Services, the median CEO pay is around US$2.7m.
The Enterprise Financial Services CEO received total compensation of just US$1.1m in the year to December 2018. That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add Enterprise Financial Services To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Enterprise Financial Services's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. Of course, just because Enterprise Financial Services is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Enterprise Financial Services, 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 email@example.com. 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.