Investors are often guided by the idea of discovering ‘the next big thing’, even if that means buying ‘story stocks’ without any revenue, let alone profit. 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 Ferrari (NYSE:RACE). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Ferrari with the means to add long-term value to shareholders.
How Fast Is Ferrari Growing Its Earnings Per Share?
Even when EPS earnings per share (EPS) growth is unexceptional, company value can be created if this rate is sustained each year. So it’s easy to see why many investors focus in on EPS growth. Ferrari’s EPS skyrocketed from €3.50 to €4.72, in just one year; a result that’s bound to bring a smile to shareholders. That’s a commendable gain of 35%.
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. The good news is that Ferrari is growing revenues, and EBIT margins improved by 3.5 percentage points to 25%, 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 Ferrari’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Ferrari Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$32b company like Ferrari. 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. We note that their impressive stake in the company is worth €3.3b. Investors will appreciate management having this amount of skin in the game as it shows their commitment to the company’s future.
It means a lot to see insiders invested in the business, but shareholders may be wondering if remuneration policies are in their best interest. Well, based on the CEO pay, you’d argue that they are indeed. The median total compensation for CEOs of companies similar in size to Ferrari, with market caps over €7.6b, is around €13m.
Ferrari’s CEO took home a total compensation package of €5.7m in the year prior to December 2021. That looks like a modest pay packet, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation shouldn’t be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.
Should You Add Ferrari To Your Watchlist?
If you believe that share price follows earnings per share you should definitely be delving further into Ferrari’s strong EPS growth. If that’s not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the key takeaway is that Ferrari is worth keeping an eye on. It is worth noting though that we have found 2 warning signs for Ferrari that you need to take into consideration.
The beauty of investing is that you can invest in almost any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
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.