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. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
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 Cass Information Systems (NASDAQ:CASS). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Cass Information Systems with the means to add long-term value to shareholders.
Cass Information Systems' Earnings Per Share Are Growing
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. Cass Information Systems managed to grow EPS by 6.0% per year, over three years. This may not be setting the world alight, but it does show that EPS is on the upwards trend.
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. Not all of Cass Information Systems' revenue this year is revenue from operations, so keep in mind the revenue and margin numbers used in this article might not be the best representation of the underlying business. While we note Cass Information Systems achieved similar EBIT margins to last year, revenue grew by a solid 22% to US$197m. That's progress.
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.
NasdaqGS:CASS Earnings and Revenue History May 20th 2023
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Cass Information Systems' balance sheet strength, before getting too excited.
Are Cass Information Systems Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, 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.
Not only did Cass Information Systems insiders refrain from selling stock during the year, but they also spent US$146k buying it. That's nice to see, because it suggests insiders are optimistic. We also note that it was the President, Martin Resch, who made the biggest single acquisition, paying US$80k for shares at about US$37.50 each.
Along with the insider buying, another encouraging sign for Cass Information Systems is that insiders, as a group, have a considerable shareholding. As a matter of fact, their holding is valued at US$16m. That shows significant buy-in, and may indicate conviction in the business strategy. While their ownership only accounts for 3.1%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. That's because Cass Information Systems' CEO, Martin Resch, is paid at a relatively modest level when compared to other CEOs for companies of this size. For companies with market capitalisations between US$200m and US$800m, like Cass Information Systems, the median CEO pay is around US$2.5m.
The CEO of Cass Information Systems only received US$1.2m in total compensation for the year ending December 2022. First impressions seem to indicate a compensation policy that is favourable to 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. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Is Cass Information Systems Worth Keeping An Eye On?
As previously touched on, Cass Information Systems is a growing business, which is encouraging. Better yet, insiders are significant shareholders, and have been buying more shares. That should do plenty in prompting budding investors to undertake a bit more research - or even adding the company to their watchlists. Of course, just because Cass Information Systems is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Keen growth investors love to see insider buying. Thankfully, Cass Information Systems 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.
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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.
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