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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
So if you're like me, you might be more interested in profitable, growing companies, like Zoetis (NYSE:ZTS). 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.
How Fast Is Zoetis 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 means EPS growth is considered a real positive by most successful long-term investors. As a tree reaches steadily for the sky, Zoetis's EPS has grown 24% 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.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Zoetis shareholders can take confidence from the fact that EBIT margins are up from 34% to 36%, and revenue is growing. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed 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 Zoetis's future profits.
Are Zoetis Insiders Aligned With All Shareholders?
Since Zoetis has a market capitalization of US$77b, we wouldn't expect insiders to hold a large percentage of shares. But we are reassured by the fact they have invested in the company. Given insiders own a small fortune of shares, currently valued at US$69m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for shareholders.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Zoetis, with market caps over US$8.0b, is about US$11m.
The Zoetis CEO received total compensation of just US$3.3m in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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 Zoetis Worth Keeping An Eye On?
You can't deny that Zoetis has grown its earnings per share at a very impressive rate. That's attractive. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that Zoetis is worth keeping an eye on. Don't forget that there may still be risks. For instance, we've identified 2 warning signs for Zoetis that you should be aware of.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.