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In the world of investing, the allure of a company capable of reversing its fortunes is often irresistible to speculators. Even firms lacking revenue, profit, and a history of meeting expectations can attract investors. Such investment decisions can sometimes be influenced more by emotions than by sound company fundamentals. However, loss-making companies need to prove their profitability eventually, or they risk the depletion of external capital.
Traditional Investment in Profitable Companies
Despite the prevalence of tech-stock blue-sky investing, many investors still adhere to traditional strategies, such as buying shares in consistently profitable companies like Medibank Private (ASX: MPL). Even if Medibank Private is fairly valued by the market, its consistent profit generation reassures investors of its potential to deliver long-term shareholder value.
Medibank Private's Impressive Earnings Growth
A crucial metric for investors is the growth in earnings per share (EPS). Consistent EPS growth often correlates with an increasing share price, making it a key focus for long-term investors. Medibank Private has demonstrated remarkable EPS growth, averaging 24% annually over the past three years. Such robust growth is a positive indicator for shareholders and potential investors alike.
Revenue and Margin Improvements
Evaluating a company's revenue and earnings before interest and tax (EBIT) margins provides further insight into its growth potential. Medibank Private has shown strong performance in this regard, with a revenue increase and an improvement in EBIT margins by 5.6 percentage points to 12% over the past year. These metrics collectively signal a healthy growth trajectory for the company.
Insider Confidence and Alignment with Shareholders
Insider actions can offer valuable clues about a company's prospects. Notably, there have been no reports of insider selling at Medibank Private in the past year. Moreover, Linda Nicholls, an Independent Non-Executive Director, purchased AU$20k worth of shares at around AU$3.65 each. Such insider buying often indicates that those closest to the company perceive its stock as undervalued and expect future gains.
CEO Compensation Reflects Shareholder Alignment
Medibank Private's CEO compensation also reflects a commitment to shareholder value. For companies with market capitalisations between AU$5.9 billion and AU$18 billion, the median CEO pay is approximately AU$4.0 million. In contrast, Medibank Private's CEO received total compensation worth AU$3.3 million for the year ending June 2023, which is below the median for similarly sized companies. This modest compensation suggests a strong alignment between the CEO's interests and those of ordinary shareholders and indicates good governance practices.
