For starters, it might seem like a good idea (and an exciting prospect) to buy a company that tells investors a good story, even if it completely lacks a track record of revenue and earnings. Unfortunately, high-risk investments are often unlikely to ever return, and many investors pay a price to learn their lesson.
Contrary to all that, I prefer to spend time on companies like Wesfarmers (ASX:WES), which not only generates revenue, but also profits. Now, I’m not saying the stock is necessarily undervalued today; but I can’t help but appreciate the profitability of the business itself. While a well-funded business may suffer losses for years, unless its owners have an endless appetite to subsidize the customer, it will eventually have to turn a profit, or else breathe its last breath.
Discover our latest analysis for Wesfarmers
How fast is Wesfarmers growing?
If a company can keep increasing its earnings per share (EPS) long enough, its stock price will eventually follow. Therefore, there are many investors who like to buy shares in companies that grow EPS. Wesfarmers managed to increase EPS by 6.6% per year, over three years. This may not be particularly high growth, but it shows that earnings per share are steadily moving in the right direction.
I like to see revenue growth as an indication that growth is sustainable, and I look for a high margin on earnings before interest and taxes (EBIT) to point to a competitive moat (although some low-margin companies also have moats). Wesfarmers has reported stable revenues and EBIT margins over the past year. That’s not bad, but it also doesn’t indicate continued future growth.
In the table below, you can see how the company has increased its profits and revenue over time. Click on the table to see the exact numbers.
Of course, the trick is to find stocks that have their best days in the future, not in the past. You can of course base your opinion on past performance, but you can also check out this interactive chart of professional analyst EPS forecasts for Wesfarmers.
Are Wesfarmers insiders aligned with all shareholders?
Like standing on the lookout, surveying the horizon at sunrise, insider buying, for some investors, brings joy. Because often buying stocks is a sign that the buyer considers them undervalued. However, insiders are sometimes wrong and we don’t know the exact logic behind their acquisitions.
Whatever your view, Wesfarmers shareholders can gain quiet confidence from the fact that insiders have paid A$626,000 to buy shares over the past year. And when you consider that there has been no insider selling, you can understand why shareholders might believe that lady luck will grace this company. Zooming in, we can see that the largest insider buy was made by non-executive director Anil Sabharwal for A$244,000 worth of shares, at around A$48.81 per share.
In addition to insider buying, it’s good to see that Wesfarmers insiders have a valuable investment in the company. With a whopping A$141 million in shares as a group, insiders have a lot to do with the company’s success. This should keep them focused on creating long-term shareholder value.
Does Wesfarmers deserve a place on your watch list?
An important and encouraging feature of Wesfarmers is that it increases its profits. On top of that, we’ve seen insiders buy stocks even if they already have a lot. This makes the company a prime candidate for my watchlist – and arguably a search priority. However, before you get too excited, we found out 1 warning sign for Wesfarmers of which you should be aware.
The good news is that Wesfarmers isn’t the only growth stock buying insiders. Here’s a list…with insider purchases over the past three months!
Please note that insider trading discussed in this article refers to reportable trading in the relevant jurisdiction.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.