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 currently lacks a track record of revenue and profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like 1st Source (NASDAQ:SRCE). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide 1st Source with the means to add long-term value to shareholders.
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That makes EPS growth an attractive quality for any company. Impressively, 1st Source has grown EPS by 17% per year, compound, in the last three years. If growth like this continues on into the future, then shareholders will have plenty to smile about.
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. Our analysis has highlighted that 1st Source's revenue from operations did not account for all of their revenue in the previous 12 months, so our analysis of its margins might not accurately reflect the underlying business. While we note 1st Source achieved similar EBIT margins to last year, revenue grew by a solid 5.6% to US$358m. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
NasdaqGS:SRCE Earnings and Revenue History September 29th 2023
Are 1st Source Insiders Aligned With All Shareholders?
Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
We note that 1st Source insiders spent US$108k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Independent Director Daniel Fitzpatrick who made the biggest single purchase, worth US$45k, paying US$45.21 per share.
The good news, alongside the insider buying, for 1st Source bulls is that insiders (collectively) have a meaningful investment in the stock. Notably, they have an enviable stake in the company, worth US$326m. Coming in at 32% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So there is opportunity here to invest in a company whose management have tangible incentives to deliver.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Chris Murphy, is paid less than the median for similar sized companies. The median total compensation for CEOs of companies similar in size to 1st Source, with market caps between US$400m and US$1.6b, is around US$3.5m.
1st Source offered total compensation worth US$2.4m to its CEO in the year to December 2022. That is actually below the median for CEO's of similarly sized companies. 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 a culture of integrity, in a broader sense.
Should You Add 1st Source To Your Watchlist?
For growth investors, 1st Source's raw rate of earnings growth is a beacon in the night. On top of that, insiders own a significant stake in the company and have been buying more shares. Astute investors will want to keep this stock on watch. You still need to take note of risks, for example - 1st Source has 1 warning sign we think you should be aware of.
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.
