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 BlueScope Steel (ASX:BSL). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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.
BlueScope Steel's Improving Profits
Over the last three years, BlueScope Steel has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a firecracker arcing through the night sky, BlueScope Steel's EPS shot from AU$1.45 to AU$3.23, over the last year. Year on year growth of 123% is certainly a sight to behold.
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. The good news is that BlueScope Steel is growing revenues, and EBIT margins improved by 3.4 percentage points to 13%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
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.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for BlueScope Steel.
Are BlueScope Steel Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
We do note that BlueScope Steel insiders netted -AU$75.3k worth of shares over the last year. But the silver lining to that cloud is that Jennifer Lambert, the Non-Executive Director, spent AU$102k buying shares at an average price of AU$17.07. So, on balance, that's positive.
The good news, alongside the insider buying, for BlueScope Steel bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold AU$60m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 1.0% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Should You Add BlueScope Steel To Your Watchlist?
BlueScope Steel's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. Growth investors should find it difficult to look past that strong EPS move. And indeed, it could be a sign that the business is at an inflection point. If that's the case, you may regret neglecting to put BlueScope Steel on your watchlist. Once you've identified a business you like, the next step is to consider what you think it's worth. And right now is your chance to view our exclusive discounted cashflow valuation of BlueScope Steel. You might benefit from giving it a glance today.
As a growth investor I do like to see insider buying. But BlueScope Steel 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
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