The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
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 Photronics (NASDAQ:PLAB). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
Photronics' Earnings Per Share Are Growing
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. To the delight of shareholders, Photronics has achieved impressive annual EPS growth of 50%, compound, over the last three years. That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The music to the ears of Photronics shareholders is that EBIT margins have grown from 11% to 23% in the last 12 months and revenues are on an upwards trend as well. 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. For finer detail, click on the image.
While we live in the present moment, there's little doubt that the future matters most in the investment decision process. So why not check this interactive chart depicting future EPS estimates, for Photronics?
Are Photronics Insiders Aligned With All Shareholders?
It's a necessity that company leaders act in the best interest of shareholders and so insider investment always comes as a reassurance to the market. Shareholders will be pleased by the fact that insiders own Photronics shares worth a considerable sum. To be specific, they have US$36m worth of shares. That's a lot of money, and no small incentive to work hard. While their ownership only accounts for 3.0%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Our quick analysis into CEO remuneration would seem to indicate they are. For companies with market capitalisations between US$400m and US$1.6b, like Photronics, the median CEO pay is around US$3.9m.
Photronics' CEO took home a total compensation package of US$1.3m in the year prior to October 2021. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. 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 good governance, more generally.
Is Photronics Worth Keeping An Eye On?
Photronics' earnings per share growth have been climbing higher at an appreciable rate. 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. Photronics certainly ticks a few boxes, so we think it's probably well worth further consideration. Now, you could try to make up your mind on Photronics 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 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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