Investors constantly seek to uncover ‘the next big thing’, often purchasing ‘story stocks’ that lack revenue or profit. However, as Peter Lynch noted in One Up On Wall Street, ‘Long shots almost never pay off.’ Companies that operate at a loss can absorb capital like a sponge, so investors should proceed with caution to avoid throwing good money after bad.
In an era dominated by tech-stock speculation, many investors lean towards a more traditional approach—investing in profitable companies such as a2 Milk (NZSE: ATM). While profitability does not inherently indicate if a stock is undervalued, it does suggest potential for appreciation, especially if the company is showing growth.
AI Revolutionizing Healthcare Investments
Artificial Intelligence is poised to transform the healthcare landscape. A growing number of companies are exploring advancements in early diagnostics and drug discovery. Encouragingly, many of these firms are valued under $10 billion in market capitalization, presenting a unique opportunity for investors to enter early.
Link Between Earnings and Share Price
If one believes in semi-efficient markets, it is reasonable to expect a company’s share price to correlate with its earnings per share (EPS) over time. Many investors gravitate towards companies with increasing EPS. Impressively, a2 Milk has achieved a remarkable compound growth rate of 19% per year in EPS over the last three years. If this growth trajectory continues, shareholders are likely to be satisfied.
Evaluating Revenue Growth and EBIT Margins
Sustainable top-line growth is a strong indicator of long-term viability, particularly when coupled with a healthy earnings before interest and taxation (EBIT) margin, which can provide a competitive edge in the market. Although a2 Milk’s EBIT margins have remained stable over the past year, the company reported a 14% increase in revenue, totaling NZ$1.9 billion. This is a positive sign of progress.
Understanding Company Performance
The accompanying chart illustrates a2 Milk’s financial performance over time, showcasing both its earnings and revenue growth. For more detailed information, click on the image.
Insider Ownership and Alignment of Interests
Future projections hold significant weight in investment decisions. Investors often feel more secure holding shares in companies where executives also have a vested interest. In this case, insiders at a2 Milk own shares worth an impressive NZ$31 million. While this constitutes only about 0.4% of the company, it indicates a beneficial alignment of interests between company leaders and shareholders.
Conclusion: A Closer Look at Growth Potential
a2 Milk has demonstrated a remarkable growth rate in its EPS, complemented by significant insider ownership. This dual factor is attractive to investors and warrants deeper investigation to assess the stock’s true value. However, it’s essential to remain cautious of potential risks, as a2 Milk presents one warning sign worth noting.
While investing in stocks without growing earnings can yield results, those prioritizing growth metrics might consider exploring our curated list of companies in New Zealand that exhibit promising growth potential and strong insider confidence.
For any feedback or concerns regarding this article, please feel free to get in touch with us directly, or reach out via email at editorial-team (at) simplywallst.com.
This article, presented by Simply Wall St, provides general commentary based on historical data and analyst forecasts. It is important to note that this content is not intended as financial advice and does not constitute a recommendation to buy or sell any stocks. Our analysis aims to deliver long-term, fundamental data-driven insights and may not account for the latest price-sensitive developments. Simply Wall St has no positions in the stocks mentioned.
