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.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Gates Industrial (NYSE:GTES). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Gates Industrial with the means to add long-term value to shareholders.
How Fast Is Gates Industrial Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Gates Industrial's shareholders have have plenty to be happy about as their annual EPS growth for the last 3 years was 54%. Growth that fast may well be fleeting, but it should be more than enough to pique the interest of the wary stock pickers. EPS growth figures have also been helped by share buybacks, showing the market that the company is in a position of financial strength, allowing it to return capital to shareholders.
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. While we note Gates Industrial achieved similar EBIT margins to last year, revenue grew by a solid 3.2% to US$3.6b. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
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 Gates Industrial.
Are Gates Industrial Insiders Aligned With All Shareholders?
Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
It's good to see Gates Industrial insiders walking the walk, by spending US$611k on shares in just twelve months. And when you consider that there was no insider selling, you can understand why shareholders might believe that there are brighter days ahead. Zooming in, we can see that the biggest insider purchase was by Independent Director Fredrik Eliasson for US$579k worth of shares, at about US$11.57 per share.
Along with the insider buying, another encouraging sign for Gates Industrial is that insiders, as a group, have a considerable shareholding. As a matter of fact, their holding is valued at US$13m. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.4% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because Gates Industrial's CEO, Ivo Jurek, is paid at a relatively modest level when compared to other CEOs for companies of this size. Our analysis has discovered that the median total compensation for the CEOs of companies like Gates Industrial with market caps between US$2.0b and US$6.4b is about US$6.7m.
Gates Industrial's CEO took home a total compensation package worth US$5.0m in the year leading up to December 2022. That is actually below the median for CEO's of similarly sized companies. 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. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Gates Industrial To Your Watchlist?
Gates Industrial's earnings per share have been soaring, with growth rates sky high. What's more, insiders own a significant stake in the company and have been buying more shares. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Gates Industrial belongs near the top of your watchlist. What about risks? Every company has them, and we've spotted 1 warning sign for Gates Industrial you should know about.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Gates Industrial, 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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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.