We'd Hesitate Mimicking This Insider

 | Apr 05, 2013 | 3:00 PM EDT
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We've noticed a substantial insider buy over at Macquarie Infrastructure (MIC): CEO James Hooke directly purchased more than 13,000 shares last week, according to an SEC filing. The size of this particular transaction, and the fact that it was put through by its chief executive, both certainly got our attention -- and there are other reasons to track insider purchases in general. Stocks with insider buying narrowly outperform the market, and we believe these actions reveal execs' particularly high confidence in a company, given their willingness to even further expose themselves to company-specific risk.

Macquarie Infrastructure, which has $2.5 billion in market capitalization, performs airport fueling and hangar services, among other things. Last year revenue rose 5%, followed by sales climbs in both 2011 and 2010. A special charge dampened operating income last year, but if we strip that out, we get a 16% jump and even more significant growth in pretax income, thanks to much lower interest expenses. The quarter also saw burgeoning cash flow from operations -- and while some of the sources of the cash appear that they may be one-time items, we think it's safe to say Macquarie's fundamentals strengthened in 2012.

Of that operating cash flow, Macquarie used about half to pay its rather high dividend: the yield is 5.1% at current prices. Still, there appears to be some risk here, as the dividend was halted in 2009, not to return until mid-2011 -- and at only about one-third of mid-2008 levels. Last summer the company finally boosted it back to pre-crisis levels. So, while the current yield is quite high, and would seem to be safe at least in the short term given the cash flow, income investors should not risk too much capital here.

In addition to that concern, the stock trades at very high earnings multiples. Analysts project earnings of just over $1 per share for this year and for 2014, making for a price-to-earnings ratio of about 50x. It's unclear how the Street accounts for such issues as related-party transactions -- which brought down Macquarie's operating income this past year -- but overall we wouldn't feel comfortable buying this stock at this valuation. Also, regardless of changes in expenses over the long term, justifying this valuation would necessitate higher top-line growth than that of 2012. So, at least for now, the stock does not look too attractive.

That leaves only the high yield as a primary reason to be interested in this name -- which, again, seems risky, given that extended suspension of payments a few years ago. The core of an income portfolio should comprise more dependable dividend payers, and while investors can certainly branch out into some more speculative names, those positions might be better filled with real estate investment trusts or other stocks paying considerably higher yields than 5%.

Taking all that into account, and based on this quick analysis, we would not recommend that income investors imitate the Macquarie CEO's recent purchase. If you decide to do further research, be sure to pay particular attention to the dividend's prospects and Macquarie's ability, at this point, to deal with an economic downturn.

-- Written by Matt Doiron

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