Here's Why We Think VMware (NYSE:VMW) Is Well Worth Watching

Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in VMware (NYSE:VMW). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.” data-reactid=”19″>If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in VMware (NYSE:VMW). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" View our latest analysis for VMware ” data-reactid=”20″>View our latest analysis for VMware

VMware’s Improving Profits

In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that VMware’s EPS went from US$3.78 to US$15.99 in just one year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement.

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. While VMware did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Fortunately, we've got access to analyst forecasts of VMware's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.” data-reactid=”37″>Fortunately, we’ve got access to analyst forecasts of VMware’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are VMware Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$62b company like VMware. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$173m. I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

Should You Add VMware To Your Watchlist?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="VMware's earnings per share have taken off like a rocket aimed right at the moon. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. At times fast EPS growth is a sign the business has reached an inflection point; and I do like those. So to my mind VMware is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. Of course, just because VMware 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.” data-reactid=”41″>VMware’s earnings per share have taken off like a rocket aimed right at the moon. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. At times fast EPS growth is a sign the business has reached an inflection point; and I do like those. So to my mind VMware is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. Of course, just because VMware 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.” data-reactid=”42″>You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.