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It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Builders FirstSource (NYSE:BLDR). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.
Builders FirstSource's Improving Profits
Investors and investment funds chase profits, and that means share prices tend rise with positive earnings per share (EPS) outcomes. So for many budding investors, improving EPS is considered a good sign. It is awe-striking that Builders FirstSource's EPS went from US$3.43 to US$12.69 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company. This could point to the business hitting a point of inflection.
Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. Builders FirstSource shareholders can take confidence from the fact that EBIT margins are up from 6.9% to 14%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
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 Builders FirstSource's future profits.
Are Builders FirstSource Insiders Aligned With All Shareholders?
Since Builders FirstSource has a market capitalisation of US$10b, we wouldn't expect insiders to hold a large percentage of shares. But thanks to their investment in the company, it's pleasing to see that there are still incentives to align their actions with the shareholders. We note that their impressive stake in the company is worth US$166m. Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.
It means a lot to see insiders invested in the business, but shareholders may be wondering if remuneration policies are in their best interest. Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations over US$8.0b, like Builders FirstSource, the median CEO pay is around US$13m.
Builders FirstSource's CEO took home a total compensation package worth US$10m in the year leading up to December 2021. That comes in below the average for similar sized companies and seems pretty reasonable. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Does Builders FirstSource Deserve A Spot On Your Watchlist?
Builders FirstSource's earnings per share have been soaring, with growth rates sky high. The cherry on top is that insiders own a bucket-load of shares, and the CEO pay seems really quite reasonable. The strong EPS improvement suggests the businesses is humming along. Big growth can make big winners, so the writing on the wall tells us that Builders FirstSource is worth considering carefully. We don't want to rain on the parade too much, but we did also find 3 warning signs for Builders FirstSource (1 shouldn't be ignored!) that you need to be mindful of.
The beauty of investing is that you can invest in almost 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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