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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 West Bancorporation (NASDAQ:WTBA). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. 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.
How Fast Is West Bancorporation Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. Impressively, West Bancorporation has grown EPS by 21% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). I note that West Bancorporation's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note West Bancorporation's EBIT margins were flat over the last year, revenue grew by a solid 26% to US$108m. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are West Bancorporation Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
Over the last 12 months West Bancorporation insiders spent US$159k more buying shares than they received from selling them. Although I don't particularly like to see selling, the fact that they put more capital in, than they extracted, is a positive in my mind. Zooming in, we can see that the biggest insider purchase was by Patrick Donovan for US$177k worth of shares, at about US$29.82 per share.
The good news, alongside the insider buying, for West Bancorporation bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold US$16m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 3.8% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Dave Nelson, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like West Bancorporation with market caps between US$200m and US$800m is about US$2.6m.
The West Bancorporation CEO received total compensation of just US$1.0m in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.
Does West Bancorporation Deserve A Spot On Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about West Bancorporation's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So I do think this is one stock worth watching. Even so, be aware that West Bancorporation is showing 1 warning sign in our investment analysis , you should know about...
As a growth investor I do like to see insider buying. But West Bancorporation isn't the only one. You can see a 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.