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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 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 American National Bankshares (NASDAQ:AMNB), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is American National Bankshares 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. Over the last three years, American National Bankshares has grown EPS by 13% per year. That's a good rate of growth, if it can be sustained.
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 American National Bankshares's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note American National Bankshares's EBIT margins were flat over the last year, revenue grew by a solid 3.2% to US$73m. That's progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
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 American National Bankshares's future profits.
Are American National Bankshares Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
Despite -US$30.1k worth of sales, American National Bankshares insiders have overwhelmingly been buying the stock, spending US$238k on purchases in the last twelve months. You could argue that level of buying implies genuine confidence in the business. It is also worth noting that it was Director Franklin Maddux who made the biggest single purchase, worth US$94k, paying US$37.40 per share.
Along with the insider buying, another encouraging sign for American National Bankshares is that insiders, as a group, have a considerable shareholding. To be specific, they have US$20m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 4.9% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Jeff Haley is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between US$200m and US$800m, like American National Bankshares, the median CEO pay is around US$1.7m.
The American National Bankshares CEO received total compensation of just US$826k in the year to December 2018. That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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 American National Bankshares Worth Keeping An Eye On?
One important encouraging feature of American National Bankshares is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of American National Bankshares.
As a growth investor I do like to see insider buying. But American National Bankshares 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
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 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. Thank you for reading.