Here's Why We Think PipeHawk (LON:PIP) Is Well Worth Watching
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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like PipeHawk (LON:PIP), which has not only revenues, but also profits. 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.
View our latest analysis for PipeHawk
How Fast Is PipeHawk Growing?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. Who among us would not applaud PipeHawk's stratospheric annual EPS growth of 46%, compound, over the last three years? While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.
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. The good news is that PipeHawk is growing revenues, and EBIT margins improved by 4.0 percentage points to 4.9%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
PipeHawk isn't a huge company, given its market capitalization of UK£2.6m. That makes it extra important to check on its balance sheet strength.
Are PipeHawk Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So we're pleased to report that PipeHawk insiders own a meaningful share of the business. In fact, they own 58% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. Of course, PipeHawk is a very small company, with a market cap of only UK£2.6m. That means insiders only have UK£1.5m worth of shares, despite the large proportional holding. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations under UK£153m, like PipeHawk, the median CEO pay is around UK£275k.
The PipeHawk CEO received total compensation of just UK£71k 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. It can also be a sign of good governance, more generally.
Should You Add PipeHawk To Your Watchlist?
PipeHawk's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The cherry on top is that insiders own a bucket-load of shares, and the CEO pay seems really quite reasonable. The strong EPS improvement suggests the businesses is humming along. PipeHawk certainly ticks a few of my boxes, so I think it's probably well worth further consideration. We should say that we've discovered 4 warning signs for PipeHawk (3 can't be ignored!) that you should be aware of before investing here.
Although PipeHawk certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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. 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.
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