Do Simply Good Foods's (NASDAQ:SMPL) Earnings Warrant Your Attention?
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 the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Simply Good Foods (NASDAQ:SMPL). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Check out our latest analysis for Simply Good Foods
Simply Good Foods's Improving Profits
Over the last three years, Simply Good Foods 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. As a result, I'll zoom in on growth over the last year, instead. Like the last firework on New Year's Eve accelerating into the sky, Simply Good Foods's EPS shot from US$0.33 to US$0.65, over the last year. Year on year growth of 96% is certainly a sight to behold. That could be a sign that the business has reached a true inflection point.
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 Simply Good Foods's EBIT margins were flat over the last year, revenue grew by a solid 62% to US$896m. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Fortunately, we've got access to analyst forecasts of Simply Good Foods's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Simply Good Foods Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
It's a pleasure to note that insiders spent US$5.6m buying Simply Good Foods shares, over the last year, without reporting any share sales whatsoever. And so I find myself almost expectant, and certainly hopeful, that this large outlay signals prescient optimism for the business. It is also worth noting that it was Independent Chairman of the Board James Kilts who made the biggest single purchase, worth US$2.0m, paying US$22.54 per share.
The good news, alongside the insider buying, for Simply Good Foods bulls is that insiders (collectively) have a meaningful investment in the stock. Given insiders own a small fortune of shares, currently valued at US$56m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for shareholders.
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, Joe Scalzo is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Simply Good Foods with market caps between US$2.0b and US$6.4b is about US$5.0m.
The Simply Good Foods CEO received US$3.3m in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. It can also be a sign of a culture of integrity, in a broader sense.
Is Simply Good Foods Worth Keeping An Eye On?
Simply Good Foods's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest Simply Good Foods belongs on the top of your watchlist. You should always think about risks though. Case in point, we've spotted 2 warning signs for Simply Good Foods you should be aware of, and 1 of them is concerning.
The good news is that Simply Good Foods is not the only growth stock with insider buying. Here's a list of them... 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.
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. 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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