U.S. markets closed
  • S&P Futures

    4,168.50
    -7.75 (-0.19%)
     
  • Dow Futures

    34,021.00
    -60.00 (-0.18%)
     
  • Nasdaq Futures

    14,003.50
    -26.00 (-0.19%)
     
  • Russell 2000 Futures

    2,255.30
    -3.70 (-0.16%)
     
  • Crude Oil

    62.85
    -0.28 (-0.44%)
     
  • Gold

    1,777.50
    -2.70 (-0.15%)
     
  • Silver

    26.03
    -0.07 (-0.29%)
     
  • EUR/USD

    1.1976
    -0.0004 (-0.04%)
     
  • 10-Yr Bond

    1.5730
    +0.0430 (+2.81%)
     
  • Vix

    16.25
    -0.32 (-1.93%)
     
  • GBP/USD

    1.3828
    -0.0011 (-0.08%)
     
  • USD/JPY

    108.6760
    -0.1070 (-0.10%)
     
  • BTC-USD

    56,357.82
    -5,029.65 (-8.19%)
     
  • CMC Crypto 200

    1,398.97
    +7.26 (+0.52%)
     
  • FTSE 100

    7,019.53
    +36.03 (+0.52%)
     
  • Nikkei 225

    29,683.37
    +40.67 (+0.14%)
     

Does Novanta (NASDAQ:NOVT) Deserve A Spot On Your Watchlist?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

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 Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In contrast to all that, I prefer to spend time on companies like Novanta (NASDAQ:NOVT), 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. 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.

View our latest analysis for Novanta

How Fast Is Novanta Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Novanta has managed to grow EPS by 28% per year over three years. So it's not surprising to see the company trades on a very high multiple of (past) earnings.

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. While we note Novanta's EBIT margins were flat over the last year, revenue grew by a solid 2.9% to US$623m. That's progress.

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.

NasdaqGS:NOVT Income Statement, January 29th 2020
NasdaqGS:NOVT Income Statement, January 29th 2020

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 Novanta's future profits.

Are Novanta 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 Novanta insiders have a significant amount of capital invested in the stock. Given insiders own a small fortune of shares, currently valued at US$94m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for shareholders.

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 Novanta with market caps between US$2.0b and US$6.4b is about US$4.9m.

The Novanta CEO received US$4.0m 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Is Novanta Worth Keeping An Eye On?

For growth investors like me, Novanta's raw rate of earnings growth is a beacon in the night. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. Each to their own, but I think all this makes Novanta look rather interesting indeed. Of course, profit growth is one thing but it's even better if Novanta is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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 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.

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. Thank you for reading.