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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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
So if you're like me, you might be more interested in profitable, growing companies, like First Community Bankshares (NASDAQ:FCBC). While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Quickly Is First Community Bankshares Increasing Earnings Per Share?
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. Impressively, First Community Bankshares has grown EPS by 19% per year, compound, in the last 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 First Community Bankshares's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. It seems First Community Bankshares is pretty stable, since revenue and EBIT margins are pretty flat year on year. That's not a major concern but nor does it point to the long term growth we like to see.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are First Community Bankshares Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
First Community Bankshares insiders both bought and sold shares over the last twelve months, but they did end up spending US$19k more on stock than they received from selling it. When you weigh that up, it is a mild positive, indicating increased alignment between shareholders and management.
The good news, alongside the insider buying, for First Community Bankshares bulls is that insiders (collectively) have a meaningful investment in the stock. With a whopping US$65m worth of shares as a group, insiders have plenty riding on the company's success. At 13% of the company, the co-investment by insiders gives me confidence that management will make long-term focussed decisions.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Will Stafford, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like First Community Bankshares with market caps between US$200m and US$800m is about US$1.7m.
The First Community Bankshares CEO received total compensation of just US$741k in the year to December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Is First Community Bankshares Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about First Community Bankshares's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if First Community Bankshares is trading on a high P/E or a low P/E, relative to its industry.
As a growth investor I do like to see insider buying. But First Community 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.