Here's Why I Think Kearny Financial (NASDAQ:KRNY) Is An Interesting Stock
Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Kearny Financial (NASDAQ:KRNY). 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
See our latest analysis for Kearny Financial
How Fast Is Kearny Financial Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. As a tree reaches steadily for the sky, Kearny Financial's EPS has grown 34% 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). I note that Kearny Financial's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note Kearny Financial's EBIT margins were flat over the last year, revenue grew by a solid 15% to US$166m. That's a real positive.
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 it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Kearny Financial's balance sheet strength, before getting too excited.
Are Kearny Financial 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 Kearny Financial insiders have a significant amount of capital invested in the stock. Indeed, they hold US$50m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 4.5% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations between US$400m and US$1.6b, like Kearny Financial, the median CEO pay is around US$2.5m.
The CEO of Kearny Financial only received US$947k in total compensation for the year ending June 2019. 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. It can also be a sign of good governance, more generally.
Is Kearny Financial Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Kearny Financial's strong EPS growth. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. Each to their own, but I think all this makes Kearny Financial look rather interesting indeed. Now, you could try to make up your mind on Kearny Financial by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
Although Kearny Financial certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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