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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Merchants Bancorp (NASDAQ:MBIN). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Merchants Bancorp'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). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. It certainly is nice to see that Merchants Bancorp has managed to grow EPS by 19% 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. I note that Merchants Bancorp's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Merchants Bancorp maintained stable EBIT margins over the last year, all while growing revenue 47% to US$194m. That's progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
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 Merchants Bancorp's future profits.
Are Merchants Bancorp Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
Merchants Bancorp insiders both bought and sold shares over the last twelve months, but they did end up spending US$48k more on stock than they received from selling it. When you weigh that up, it is a mild positive, indicating increased alignment between shareholders and management. Zooming in, we can see that the biggest insider purchase was by President of Merchants Capital Corp Michael Dury for US$201k worth of shares, at about US$16.73 per share.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Merchants Bancorp insiders own more than a third of the company. Actually, with 44% of the company to their names, insiders are profoundly invested in the business. I'm always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. And their holding is extremely valuable at the current share price, totalling US$213m. Now that's what I call some serious skin in the game!
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. That's because on our analysis the CEO, Mike Dunlap, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Merchants Bancorp with market caps between US$200m and US$800m is about US$2.2m.
The CEO of Merchants Bancorp only received US$1.0m in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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. It can also be a sign of good governance, more generally.
Is Merchants Bancorp Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Merchants Bancorp's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So I do think this is one stock worth watching. Still, you should learn about the 4 warning signs we've spotted with Merchants Bancorp (including 2 which are a bit concerning) .
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Merchants Bancorp, 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.
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. 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.
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