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 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.
So if you're like me, you might be more interested in profitable, growing companies, like NorthWestern (NYSE:NWE). 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. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
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How Quickly Is NorthWestern Increasing Earnings Per Share?
As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Over the last three years, NorthWestern has grown EPS by 13% per year. That's a pretty good rate, if the company can sustain it.
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. While NorthWestern may have maintained EBIT margins over the last year, revenue has fallen. Suffice it to say that is not a great sign of growth.
In the chart below, you can see how the company has grown earnings, and revenue, 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 NorthWestern's future profits.
Are NorthWestern 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. As a result, I'm encouraged by the fact that insiders own NorthWestern shares worth a considerable sum. To be specific, they have US$18m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 0.5% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
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$2.0b and US$6.4b, like NorthWestern, the median CEO pay is around US$5.2m.
The NorthWestern CEO received US$3.2m in compensation for the year ending December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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 NorthWestern Worth Keeping An Eye On?
As I already mentioned, NorthWestern is a growing business, which is what I like to see. Earnings growth might be the main game for NorthWestern, but the fun does not stop there. Boasting both modest CEO pay and considerable insider ownership, I'd argue this one is worthy of the watchlist, at least. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if NorthWestern is trading on a high P/E or a low P/E, relative to its industry.
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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