Here’s why we think Group 3i (LON: III) is worth watching
Like a puppy chasing its tail, some new investors often chase “the next big thing,” even if that means buying “history stocks” with no income, let alone profit. But as Warren Buffett said, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you are the patsy.” When buying such historical stocks, investors are all too often dumb.
In the age of investing in the blue sky of tech stocks, my choice may seem old-fashioned; I always prefer profitable businesses like Group 3i (LON: III). Even if stocks are fully valued today, most capitalists would recognize its benefits as a demonstration of constant value generation. By comparison, loss-making companies act like a sponge for capital – but unlike such a sponge, they don’t always produce something when in a hurry.
Discover our latest analysis for Group 3i
Group 3i earnings per share are growing.
The market is a short-term voting machine, but a long-term weighing machine, so the stock price eventually follows earnings per share (EPS). This means that growing EPS is seen as a real benefit by most successful long-term investors. Impressively, 3i Group has increased its EPS by 23% per year, compounded, over the past three years. If the company can support this kind of growth, we expect shareholders to come out ahead.
A close look at growth in income and profit margins before interest and taxes (EBIT) can help inform a vision on the sustainability of recent earnings growth. I note that the turnover of Group 3i operations was lower than its turnover for the last twelve months, which could skew my analysis of its margins. The good news is that the 3i Group is increasing its revenues and its EBIT margins improved by 9.8 percentage points to 96%, over the last year. Checking those two boxes is a good sign of growth in my book.
The graph below shows how the company’s bottom line has progressed over time. Click on the graph to see the exact numbers.
Fortunately, we have access to the forecasts of the analysts of the Group 3i future profits. You can make your own predictions without looking, or you can take a look at what the pros are predicting.
Are 3i group insiders aligned with all shareholders?
Like street kids who stand up for their beliefs, buying insider shares gives me reason to believe in a better future. This view is based on the possibility that stock purchases signal an uptrend on behalf of the buyer. Of course, we can never be sure what insiders think, we can only judge their actions.
Despite – Â£ 69million in sales, 3i Group insiders have bought the shares overwhelmingly, spending Â£ 69million on purchases over the past twelve months. Overall, to me, that signals their optimism. Zooming in we can see that the biggest insider buy was made by CEO and Executive Director Simon Borrows for Â£ 59million of shares, at around Â£ 11.78 per share.
The good news alongside insider buying for bulls in the 3i group is that insiders (collectively) have a significant investment in the stock. Indeed, they have invested a sparkling mountain of wealth, currently valued at Â£ 244million. I would find that kind of skin in the game quite encouraging, if I owned any stocks, as it would ensure that the leaders of the company would also experience my success, or failure, with the action.
Does Group 3i deserve a spot on your watchlist?
For growth investors like myself, Group 3i’s gross earnings growth rate is a beacon overnight. Not only that, but we can see that insiders both own a lot of shares in the company and buy more of it. So I think this is an action to watch. However, be aware that 3i Group displays 3 warning signs in our investment analysis , and 2 of them are significant …
There are many other companies in which insiders buy shares. So if you like the sound of 3i Group, you are probably going to love this free list of growing companies that insiders buy.
Please note that the insider trading discussed in this article refers to reportable trades in the relevant jurisdiction.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.