For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Holmen (STO:HOLM B). While profit is not necessarily a social good, it’s easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
See our latest analysis for Holmen
Holmen’s Improving Profits
In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. You can imagine, then, that it almost knocked my socks off when I realized that Holmen grew its EPS from kr13.50 to kr52.57, in one short year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. On the one hand, Holmen’s EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
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.
OM:HOLM B Income Statement March 26th 2020
While we live in the present moment at all times, there’s no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Holmen?
Are Holmen Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
Although we did see some insider selling (worth -kr3.2m) this was overshadowed by a mountain of buying, totalling kr20m in just one year. I find this encouraging because it suggests they are optimistic about the Holmen’s future. We also note that it was the President, Henrik Sjölund, who made the biggest single acquisition, paying kr7.3m for shares at about kr194 each.
The good news, alongside the insider buying, for Holmen bulls is that insiders (collectively) have a meaningful investment in the stock. Given insiders own a small fortune of shares, currently valued at kr742m, they have plenty of motivation to push the business to succeed. That’s certainly enough to make me think that management will be very focussed on long term growth.
Does Holmen Deserve A Spot On Your Watchlist?
Holmen’s earnings have taken off like any random crypto-currency did, back in 2017. What’s more insiders own a significant stake in the company and have been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Holmen deserves timely attention. It’s still necessary to consider the ever-present spectre of investment risk. We’ve identified 2 warning signs with Holmen (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.
As a growth investor I do like to see insider buying. But Holmen 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.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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