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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. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Escalade (NASDAQ:ESCA). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. 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 Escalade Increasing Earnings Per Share?
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. It certainly is nice to see that Escalade has managed to grow EPS by 29% per year 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.
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 Escalade is growing revenues, and EBIT margins improved by 6.7 percentage points to 13%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Escalade's balance sheet strength, before getting too excited.
Are Escalade Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
One gleaming positive for Escalade, in the last year, is that a certain insider has buying shares with ample enthusiasm. Specifically, in one large transaction Chairman of the Board Walter Glazer paid US$613k, for stock at US$11.78 per share. It doesn't get much better than that, in terms of large investments from insiders.
On top of the insider buying, it's good to see that Escalade insiders have a valuable investment in the business. With a whopping US$90m worth of shares as a group, insiders have plenty riding on the company's success. That holding amounts to 25% of the stock on issue, thus making insiders influential, and aligned, owners of the business.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Walt Glazer, is paid less than the median for similar sized companies. For companies with market capitalizations between US$200m and US$800m, like Escalade, the median CEO pay is around US$1.7m.
The Escalade CEO received total compensation of just US$130k in the year to . 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.
Should You Add Escalade To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Escalade's strong EPS growth. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So I do think this is one stock worth watching. We don't want to rain on the parade too much, but we did also find 1 warning sign for Escalade that you need to be mindful of.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Escalade, you'll probably love this free list of growing companies that insiders are buying.
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.
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