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.
If this kind of company isn’t your style, you like companies that generate revenue, and even earn profits, then you may well be interested in International Business Machines (NYSE:IBM). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide International Business Machines with the means to add long-term value to shareholders.
View our latest analysis for International Business Machines
How Quickly Is International Business Machines Increasing Earnings Per Share?
If you believe that markets are even vaguely efficient, then over the long term you’d expect a company’s share price to follow its earnings per share (EPS) outcomes. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that International Business Machines has managed to grow EPS by 36% per year over three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be beaming.
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. The music to the ears of International Business Machines shareholders is that EBIT margins have grown from 3.5% to 16% in the last 12 months and revenues are on an upwards trend as well. Both of which are great metrics to check off for potential growth.
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 International Business Machines’ future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are International Business Machines Insiders Aligned With All Shareholders?
Since International Business Machines has a market capitalisation of US$168b, we wouldn’t expect insiders to hold a large percentage of shares. But we are reassured by the fact they have invested in the company. Notably, they have an enviable stake in the company, worth US$168m. We note that this amounts to 0.1% of the company, which may be small owing to the sheer size of International Business Machines but it’s still worth mentioning. This should still be a great incentive for management to maximise shareholder value.
Should You Add International Business Machines To Your Watchlist?
You can’t deny that International Business Machines has grown its earnings per share at a very impressive rate. That’s attractive. With EPS growth rates like that, it’s hardly surprising to see company higher-ups place confidence in the company through continuing to hold a significant investment. The growth and insider confidence is looked upon well and so it’s worthwhile to investigate further with a view to discern the stock’s true value. We should say that we’ve discovered 1 warning sign for International Business Machines that you should be aware of before investing here.
While opting for stocks without growing earnings and absent insider buying can yield results, for investors valuing these key metrics, here is a carefully selected list of companies in the US with promising growth potential and insider confidence.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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