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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in RBC Bearings (NASDAQ:ROLL). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
RBC Bearings's Earnings Per Share Are Growing.
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, RBC Bearings has grown EPS by 20% 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.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. RBC Bearings maintained stable EBIT margins over the last year, all while growing revenue 3.4% to US$724m. That's a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of RBC Bearings's forecast profits?
Are RBC Bearings Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that RBC Bearings insiders have a significant amount of capital invested in the stock. With a whopping US$90m worth of shares as a group, insiders have plenty riding on the company's success. This should keep them focused on creating long term value for shareholders.
Should You Add RBC Bearings To Your Watchlist?
For growth investors like me, RBC Bearings's raw rate of earnings growth is a beacon in the night. Further, the high level of insider ownership impresses me, and suggests that I'm not the only one who appreciates the EPS growth. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. Still, you should learn about the 1 warning sign we've spotted with RBC Bearings .
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.
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