Huge Insider Ownership? – Count Me In!

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the top people in a company own a huge chunk of shares, it's usually a positive sign. When a top officer in the company owns shares, their interests align more with the common shareholder. They care more about how to increase the value of the company and thus the stock, and they are less concerned about just making money from their salary. I recently ran the following screen on Motley Fool CAPS:

  1. 50%+ Insider Ownership

  2. 50% or less Institutional Ownership

  3. Rated 4 – 5 stars

  4. Positive earnings growth last 3 years

This screen returned only a few companies, and just two that seem attractive at these prices. The two companies are Continental Resources Inc. (NYSE: CLR) and Bruker Corp. (NASDAQ: BRKR).

Continental Resources Inc.

Continental Resources is an oil exploration and development company. The company's majority owner is CEO Harold Hamm. To say that Mr. Hamm controls the company shares is an understatement. At last count Mr. Hamm owns over 123 million of the roughly 180 million shares, equivalent to 68.33% of the shares. The stock currently sells for 24.14 times 2012 earnings, and is expected to grow EPS by 25% in the next several years. Size is a critical factor when it comes to oil companies. Many small oil companies invest so heavily in exploration that they run cash flow negative for years. Once this exploration begins to pay off, the company shows better earnings and cash flow. There might not be a better picture of the growth that Continental has experienced in the last few years than the following chart.

<img src="/media/images/user_93/clr-revenue-chart_large.gif" />

Small oil companies are able to spread their costs across a greater base as they gain critical mass. Look at what has happened to the gross margin of Continental in the last 3 years.

2009 – 83%
2010 – 88%
2011 – 90% 

Size matters in the oil industry. As Continental continues to grow, this company appears positioned to reward shareholders. In addition, the consolidation in the oil industry makes Continental an attractive takeover target. The company's debt is not excessive, and the company is clearly growing at a high rate.

Bruker Corp.

Bruker Corp. is involved in the scientific instruments and energy technologies fields. The company's systems are used in research and development and industrial production. Bruker's goal is to be the leader in instrumentation for each analytical task. The company's majority owner is CEO Dr. Frank Laukien, who owns nearly 39 million shares. Two other directors, Joerg Laukien and Dirk Laukien, combined own almost 34 million shares. These family members hold a combined 44.24% of the outstanding shares. The shares trade for about 15.74 times 2012 earnings, and the company is expected to grow EPS by 14.56% over the next few years. In the most recent earnings release, Bruker said it is targeting currency-adjusted revenue growth of 7-10%, operating margin improvement of 120-140 basis points, and EPS of $0.94 - $0.98. These projections are in the middle of EPS projections, but the low end of revenue projections. The company has missed earnings estimates in three of the last four quarters, and 2012 earnings projections have been lowered slightly in the last 90 days.

Another challenge for Bruker is, the company generates less than half of the free cash flow of its competition. Bruker generated about $0.02 of free cash flow per $1 of assets in the last year. By comparison, Thermo Fisher Scientific (NYSE: TMO) generated about $0.05 of free cash flow per $1 of assets during this same timeframe. On the positive side, Bruker is both industry diversified, and geographically diversified. The fact that the Motley Fool CAPS community has rated Bruker with 36 outperform ratings, and only 1 underperform rating is a plus as well.

These two companies could have been overlooked by Wall Street, or they just might not be interested. Of the two, Continental Resources seems the better play. Don't take my word for it though, do your own research and see if either of these companies deserves your attention. I'm willing to bet these owners know their companies better than I do, and I'm adding an outperform call on both CLR and BRKR on CAPS today. Let me know what you think in the comments section below.

Motley Fool newsletter services recommend Thermo Fisher Scientific. The Motley Fool has no positions in the stocks mentioned above. MHenage has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

blog comments powered by Disqus