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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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like MGM Growth Properties (NYSE:MGP), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
MGM Growth Properties's Improving Profits
Over the last three years, MGM Growth Properties has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a falcon taking flight, MGM Growth Properties's EPS soared from US$0.71 to US$0.96, over the last year. That's a impressive gain of 35%.
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. I note that MGM Growth Properties'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 MGM Growth Properties's EBIT margins were flat over the last year, revenue grew by a solid 33% to US$1.1b. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
Fortunately, we've got access to analyst forecasts of MGM Growth Properties's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are MGM Growth Properties Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Like a sturdy phalanx MGM Growth Properties insiders have stood united by refusing to sell shares over the last year. But my excitement comes from the US$62k that Director Robert Smith spent buying shares (at an average price of about US$31.14).
The good news, alongside the insider buying, for MGM Growth Properties bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have US$14m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 0.1% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, James Stewart is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like MGM Growth Properties with market caps between US$4.0b and US$12b is about US$7.0m.
The MGM Growth Properties CEO received US$3.5m in compensation for the year ending December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Does MGM Growth Properties Deserve A Spot On Your Watchlist?
For growth investors like me, MGM Growth Properties's raw rate of earnings growth is a beacon in the night. Better still, insiders own a large chunk of the company and one has even been buying more shares. So I do think this is one stock worth watching. 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 MGM Growth Properties is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of MGM Growth Properties, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.