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Is Now The Time To Put Aerojet Rocketdyne Holdings (NYSE:AJRD) On Your Watchlist?

Simply Wall St

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. 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.

So if you're like me, you might be more interested in profitable, growing companies, like Aerojet Rocketdyne Holdings (NYSE:AJRD). 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.

See our latest analysis for Aerojet Rocketdyne Holdings

How Fast Is Aerojet Rocketdyne Holdings Growing?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. I, for one, am blown away by the fact that Aerojet Rocketdyne Holdings has grown EPS by 50% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.

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. Aerojet Rocketdyne Holdings's EBIT margins have actually improved by 3.1 percentage points in the last year, to reach 11%, but, on the flip side, revenue was down 4.5%. That's not ideal.

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.

NYSE:AJRD Income Statement, December 1st 2019
NYSE:AJRD Income Statement, December 1st 2019

Fortunately, we've got access to analyst forecasts of Aerojet Rocketdyne Holdings's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Aerojet Rocketdyne Holdings Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that Aerojet Rocketdyne Holdings insiders have a significant amount of capital invested in the stock. With a whopping US$90m worth of shares as a group, insiders have plenty riding on the company's success. This should keep them focused on creating long term value for shareholders.

Is Aerojet Rocketdyne Holdings Worth Keeping An Eye On?

Aerojet Rocketdyne Holdings's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it's worth considering Aerojet Rocketdyne Holdings for a spot on your watchlist. 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 Aerojet Rocketdyne Holdings is trading on a high P/E or a low P/E, relative to its industry.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.