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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In contrast to all that, I prefer to spend time on companies like Cincinnati Financial (NASDAQ:CINF), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that 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.
Cincinnati Financial'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). That means EPS growth is considered a real positive by most successful long-term investors. I, for one, am blown away by the fact that Cincinnati Financial has grown EPS by 50% per year, over the last three years. That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.
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). I note that Cincinnati Financial's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. The good news is that Cincinnati Financial is growing revenues, and EBIT margins improved by 26.2 percentage points to 32%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
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.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Cincinnati Financial's forecast profits?
Are Cincinnati Financial 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.
Despite -US$90.0k worth of sales, Cincinnati Financial insiders have overwhelmingly been buying the stock, spending US$532k on purchases in the last twelve months. On balance, to me, this signals their optimism. It is also worth noting that it was Independent Director Douglas Skidmore who made the biggest single purchase, worth US$250k, paying US$91.00 per share.
On top of the insider buying, it's good to see that Cincinnati Financial insiders have a valuable investment in the business. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$321m. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Steve Johnston, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Cincinnati Financial, with market caps over US$8.0b, is about US$12m.
The Cincinnati Financial CEO received total compensation of just US$5.5m in the year to . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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.
Should You Add Cincinnati Financial To Your Watchlist?
Cincinnati Financial's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest Cincinnati Financial belongs on the top of your watchlist. What about risks? Every company has them, and we've spotted 2 warning signs for Cincinnati Financial (of which 1 makes us a bit uncomfortable!) you should know about.
As a growth investor I do like to see insider buying. But Cincinnati Financial isn't the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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.
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