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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like United Security Bancshares (NASDAQ:UBFO). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
United Security Bancshares'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 makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, United Security Bancshares's EPS has grown 29% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that United Security Bancshares's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. United Security Bancshares maintained stable EBIT margins over the last year, all while growing revenue 13% to US$43m. That's a real positive.
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.
United Security Bancshares isn't a huge company, given its market capitalization of US$185m. That makes it extra important to check on its balance sheet strength.
Are United Security Bancshares 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, small purchases are not always indicative of conviction, and insiders don't always get it right.
The good news for United Security Bancshares shareholders is that no insiders reported selling shares in the last year. So it's definitely nice that Senior VP & COO David Eytcheson bought US$9.9k worth of shares at an average price of around US$10.94.
On top of the insider buying, it's good to see that United Security Bancshares insiders have a valuable investment in the business. To be specific, they have US$29m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 16% of the company, demonstrating a degree of high-level alignment with shareholders.
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, Dennis Woods, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like United Security Bancshares with market caps between US$100m and US$400m is about US$1.2m.
United Security Bancshares offered total compensation worth US$808k to its CEO in the year to December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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. It can also be a sign of good governance, more generally.
Is United Security Bancshares Worth Keeping An Eye On?
You can't deny that United Security Bancshares has grown its earnings per share at a very impressive rate. That's attractive. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. Of course, just because United Security Bancshares 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.
The good news is that United Security Bancshares is not the only growth stock with insider buying. Here's a list of them... 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
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