Here's Why I Think Freehold Royalties (TSE:FRU) Might Deserve Your Attention Today
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 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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Freehold Royalties (TSE:FRU). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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.
See our latest analysis for Freehold Royalties
Freehold Royalties's Improving Profits
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. You can imagine, then, that it almost knocked my socks off when I realized that Freehold Royalties grew its EPS from CA$0.006 to CA$0.70, in one short year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement. Could this be a sign that the business has reached an inflection point?
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). The good news is that Freehold Royalties is growing revenues, and EBIT margins improved by 47.8 percentage points to 56%, over the last year. That's great to see, on both counts.
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.
Fortunately, we've got access to analyst forecasts of Freehold Royalties's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Freehold Royalties 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.
Any way you look at it Freehold Royalties shareholders can gain quiet confidence from the fact that insiders shelled out CA$482k to buy stock, over the last year. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. We also note that it was the Independent Director, Maureen Howe, who made the biggest single acquisition, paying CA$314k for shares at about CA$14.93 each.
It's reassuring that Freehold Royalties insiders are buying the stock, but that's not the only reason to think management are fair to shareholders. Specifically, the CEO is paid quite reasonably for a company of this size. For companies with market capitalizations between CA$1.3b and CA$4.1b, like Freehold Royalties, the median CEO pay is around CA$2.8m.
The Freehold Royalties CEO received total compensation of just CA$624k in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Freehold Royalties To Your Watchlist?
Freehold Royalties's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The company can also boast of insider buying, and reasonable remuneration for the CEO. It could be that Freehold Royalties is at an inflection point, given the EPS growth. For those chasing fast growth, then, I'd suggest to stock merits monitoring. You should always think about risks though. Case in point, we've spotted 3 warning signs for Freehold Royalties you should be aware of, and 1 of them doesn't sit too well with us.
As a growth investor I do like to see insider buying. But Freehold Royalties 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
