Do Downer EDI's (ASX:DOW) Earnings Warrant Your Attention?

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It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.

So if you’re like me, you might be more interested in profitable, growing companies, like Downer EDI (ASX:DOW). While profit is not necessarily a social good, it’s easy to admire a business than can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Downer EDI

How Quickly Is Downer EDI Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Downer EDI managed to grow EPS by 4.1% per year, over three years. While that sort of growth rate isn’t amazing, it does show the business is growing.

One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Downer EDI maintained stable EBIT margins over the last year, all while growing revenue 6.3% to AU$13b. That’s a real positive.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

ASX:DOW Income Statement, October 12th 2019

Fortunately, we’ve got access to analyst forecasts of Downer EDI’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Downer EDI 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.

Not only did Downer EDI insiders refrain from selling stock during the year, but they also spent AU$194k buying it. That’s nice to see, because it suggests insiders are optimistic. Zooming in, we can see that the biggest insider purchase was by Independent Non Executive Chairman Richard Harding for AU$100k worth of shares, at about AU$6.82 per share.

The good news, alongside the insider buying, for Downer EDI bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold AU$23m worth of its stock. That’s a lot of money, and no small incentive to work hard. Even though that’s only about 0.5% of the company, it’s enough money to indicate alignment between the leaders of the business and ordinary shareholders.

Is Downer EDI Worth Keeping An Eye On?

One important encouraging feature of Downer EDI is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist – and arguably a research priority. Now, you could try to make up your mind on Downer EDI by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.

As a growth investor I do like to see insider buying. But Downer EDI 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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.