Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Southern Cross Electrical Engineering (ASX:SXE). While profit is not necessarily a social good, it’s easy to admire a business that can consistently produce it. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
See our latest analysis for Southern Cross Electrical Engineering
Southern Cross Electrical Engineering’s Earnings Per Share Are Growing.
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That makes EPS growth an attractive quality for any company. We can see that in the last three years Southern Cross Electrical Engineering grew its EPS by 11% per year. That growth rate is fairly good, assuming the company can keep it up.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Unfortunately, Southern Cross Electrical Engineering’s revenue dropped 11% last year, but the silver lining is that EBIT margins improved from 3.9% to 6.0%. That falls short of ideal.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
Southern Cross Electrical Engineering isn’t a huge company, given its market capitalization of AU$141m. That makes it extra important to check on its balance sheet strength.
Are Southern Cross Electrical Engineering Insiders Aligned With All Shareholders?
I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that Southern Cross Electrical Engineering insiders have a significant amount of capital invested in the stock. Indeed, they hold AU$35m worth of its stock. That’s a lot of money, and no small incentive to work hard. Those holdings account for over 25% of the company; visible skin in the game.
Should You Add Southern Cross Electrical Engineering To Your Watchlist?
One important encouraging feature of Southern Cross Electrical Engineering is that it is growing profits. If that’s not enough on its own, there is also the rather notable levels of insider ownership. That combination appeals to me, for one. So yes, I do think the stock is worth keeping an eye on. Even so, be aware that Southern Cross Electrical Engineering is showing 1 warning sign in our investment analysis , you should know about…
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
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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