Investors can buy low cost index fund if they want to receive the average market return. But in any diversified portfolio of stocks, you’ll see some that fall short of the average. For example, the Magna International Inc. (TSE:MG) share price return of 21% over three years lags the market return in the same period. Zooming in, the stock is up a respectable 7.8% in the last year.
With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
View our latest analysis for Magna International
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Over the last three years, Magna International failed to grow earnings per share, which fell 20% (annualized).
So we doubt that the market is looking to EPS for its main judge of the company’s value. 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.
It may well be that Magna International revenue growth rate of 4.5% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Magna International is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Magna International stock, you should check out this free report showing analyst consensus estimates for future profits.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Magna International, it has a TSR of 31% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Magna International shareholders have received returns of 11% over twelve months (even including dividends), which isn’t far from the general market return. That gain looks pretty satisfying, and it is even better than the five-year TSR of 3% per year. Even if the share price growth slows down from here, there’s a good chance that this is business worth watching in the long term. It’s always interesting to track share price performance over the longer term. But to understand Magna International better, we need to consider many other factors. Like risks, for instance. Every company has them, and we’ve spotted 3 warning signs for Magna International (of which 1 doesn’t sit too well with us!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Canadian 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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