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Does NorthWestern (NYSE:NWE) Deserve A Spot On Your Watchlist?

Simply Wall St

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. 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 NorthWestern (NYSE:NWE), 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

View our latest analysis for NorthWestern

How Fast Is NorthWestern Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. We can see that in the last three years NorthWestern grew its EPS by 6.6% per year. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. NorthWestern reported flat revenue and EBIT margins over the last year. That's not bad, but it doesn't point to ongoing future growth, either.

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.

NYSE:NWE Income Statement, November 4th 2019

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 NorthWestern's future profits.

Are NorthWestern Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that NorthWestern insiders have a significant amount of capital invested in the stock. Indeed, they hold US$28m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 0.8% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like NorthWestern with market caps between US$2.0b and US$6.4b is about US$5.1m.

The NorthWestern CEO received US$3.2m in compensation for the year ending December 2018. That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. It can also be a sign of good governance, more generally.

Is NorthWestern Worth Keeping An Eye On?

One important encouraging feature of NorthWestern is that it is growing profits. The fact that EPS is growing is a genuine positive for NorthWestern, but the pretty picture gets better than that. Boasting both modest CEO pay and considerable insider ownership, I'd argue this one is worthy of the watchlist, at least. Now, you could try to make up your mind on NorthWestern by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.