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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. 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 Polypipe Group (LON:PLP). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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 Fast Is Polypipe Group Growing?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Over the last three years, Polypipe Group has grown EPS by 13% per year. That growth rate is fairly good, assuming the company can keep it up.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While we note Polypipe Group's EBIT margins were flat over the last year, revenue grew by a solid 5.2% to UK£433m. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Polypipe Group's forecast profits?.
Are Polypipe Group 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 Polypipe Group insiders have a significant amount of capital invested in the stock. Indeed, they hold UK£30m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 3.6% 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 UK£307m and UK£1.2b, like Polypipe Group, the median CEO pay is around UK£848k.
Polypipe Group offered total compensation worth UK£637k to its CEO in the year to December 2017. That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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 Polypipe Group To Your Watchlist?
As I already mentioned, Polypipe Group is a growing business, which is what I like to see. Earnings growth might be the main game for Polypipe Group, 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. Now, you could try to make up your mind on Polypipe Group 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 Polypipe Group 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
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