Investors can buy low cost index fund if they want to receive the average market return. But across the board there are plenty of stocks that underperform the market. That’s what has happened with the Lear Corporation (NYSE:LEA) share price. It’s up 39% over three years, but that is below the market return. Disappointingly, the share price is down 7.4% in the last year.
Since the stock has added US$480m to its market cap in the past week alone, let’s see if underlying performance has been driving long-term returns.
See our latest analysis for Lear
To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the three years of share price growth, Lear actually saw its earnings per share (EPS) drop 49% per year.
This means it’s unlikely the market is judging the company based on earnings growth. Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
Do you think that shareholders are buying for the 0.05% per annum revenue growth trend? We don’t. So truth be told we can’t see an easy explanation for the share price action, but perhaps you can…
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Lear is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. If you are thinking of buying or selling Lear stock, you should check out this free report showing analyst consensus estimates for future profits.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Lear’s TSR for the last 3 years was 45%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While it’s certainly disappointing to see that Lear shares lost 5.7% throughout the year, that wasn’t as bad as the market loss of 7.5%. Longer term investors wouldn’t be so upset, since they would have made 2%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We’ve identified 4 warning signs with Lear (at least 1 which shouldn’t be ignored) , and understanding them should be part of your investment process.
We will like Lear better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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