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 Lennar (NYSE:LEN). While this doesn’t necessarily speak to whether it’s undervalued, the profitability of the business is enough to warrant some appreciation – especially if its growing.
View our latest analysis for Lennar
How Quickly Is Lennar Increasing Earnings Per Share?
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That means EPS growth is considered a real positive by most successful long-term investors. Shareholders will be happy to know that Lennar’s EPS has grown 37% each year, compound, 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.
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. Our analysis has highlighted that Lennar’s revenue from operations did not account for all of their revenue in the previous 12 months, so our analysis of its margins might not accurately reflect the underlying business. The good news is that Lennar is growing revenues, and EBIT margins improved by 5.5 percentage points to 22%, over the last year. 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 Lennar’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Lennar Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$24b company like Lennar. But thanks to their investment in the company, it’s pleasing to see that there are still incentives to align their actions with the shareholders. Indeed, they have a considerable amount of wealth invested in it, currently valued at US$2.2b. Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.
Does Lennar Deserve A Spot On Your Watchlist?
If you believe that share price follows earnings per share you should definitely be delving further into Lennar’s strong EPS growth. This EPS growth rate is something the company should be proud of, and so it’s no surprise that insiders are holding on to a considerable chunk of shares. Fast growth and confident insiders should be enough to warrant further research, so it would seem that it’s a good stock to follow. We should say that we’ve discovered 2 warning signs for Lennar (1 is a bit concerning!) that you should be aware of before investing here.
There’s always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you 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.