Buying stock in companies with a compelling narrative even if they are losing money is a typical practise among investors, particularly novice ones. These tales can occasionally mislead investors, causing them to make emotional investments rather than ones based on sound business realities. Investors in loss-making companies may be taking on more risk than they should because these organisations are continually in a race against time to achieve financial viability.
Even though we live in the era of tech-stock blue-sky investing, a lot of investors continue to use a more conventional approach by purchasing stock in successful businesses like GMS (NYSE:GMS). Investors concur that steady earnings growth will give GMS the ability to continue delivering long-term value to shareholders, even if the market values this company correctly.
GMS has increased earnings per share (EPS) at an impressive rate over the last three years, coming from a relatively low starting point. As a result, the three-year percentage growth rate isn’t very representative of anticipated future performance. Therefore, it makes logical to concentrate on growth rates that are more recent. The fact that GMS’s EPS increased from US$7.03 to US$8.14 in a year is encouraging. In the grand scheme of things, that represents a healthy growth of sixteen percent.
Examining the changes in a company’s revenue and earnings before interest and tax (EBIT) margins is one technique to confirm its growth. Although GMS’s EBIT margins are comparable to those of the previous year, its revenue increased significantly to US$5.4 billion, or 8.6%. That’s good news for the business!
The company’s top and bottom lines are displayed in the chart below as they have changed through time. You can click on the image to get more detail.
Company executives must always behave in the best interests of shareholders, which is why insider investing gives the market comfort. The fact that insiders have a sizable amount of cash that matches their interests with those of the larger shareholder group should reassure GMS devotees. They do, in fact, own stock worth US$16 million. That’s a substantial financial incentive to put forth extra effort. Even though they only own 0.6% of the company, this is still a sizable sum that could motivate it to continue on a path that will benefit shareholders.
Although insiders’ investment in the company is encouraging, are their compensation levels fair? Our cursory examination of CEO compensation seems to suggest that they do. The median CEO salary for businesses like GMS that have market capitalizations between US$2.0b and US$6.4b is approximately US$6.7m.
The CEO of GMS received US$5.1 million in pay in the year before to April 2023. In actuality, that is lower than the median for CEOs of businesses of comparable sizes. Although CEO compensation is not the most crucial indicator for investors, modest compensation does encourage better alignment between the CEO and common shareholders. In general, one may argue that fair compensation levels demonstrate sound judgement.
GMS is showing optimistic signs, one of which is its increasing profitability. For GMS, the fact that EPS is increasing is undoubtedly encouraging, but the good news doesn’t end there. There is no denying that this is a stock worth investigating, especially given that corporate insiders have a strong affinity with the company’s performance and the CEO’s modest remuneration. Remember that there can be dangers left. For example, there are two warning indications for GMS that you should be aware of—one of which is crucial.