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.'
So if you're like me, you might be more interested in profitable, growing companies, like Teradyne (NASDAQ:TER). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.
Teradyne's Earnings Per Share Are Growing.
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. Impressively, Teradyne has grown EPS by 34% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
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 Teradyne may have maintained EBIT margins over the last year, revenue has fallen. And that does make me a little more cautious of the stock.
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.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Teradyne.
Are Teradyne Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Although we did see some insider selling (worth -US$9.4m) this was overshadowed by a mountain of buying, totalling US$11m in just one year. This makes me even more interested in Teradyne because it suggests that those who understand the company best, are optimistic. Zooming in, we can see that the biggest insider purchase was by President Mark Jagiela for US$4.0m worth of shares, at about US$36.90 per share.
On top of the insider buying, it's good to see that Teradyne insiders have a valuable investment in the business. To be specific, they have US$44m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 0.5% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Does Teradyne Deserve A Spot On Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Teradyne's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. Now, you could try to make up your mind on Teradyne by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
The good news is that Teradyne 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
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