By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, Knorr-Bremse AG (ETR:KBX) shareholders have seen the share price rise 57% over three years, well in excess of the market return (25%, not including dividends). On the other hand, the returns haven’t been quite so good recently, with shareholders up just 18%, including dividends.
On the back of a solid 7-day performance, let’s check what role the company’s fundamentals have played in driving long term shareholder returns.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the three years of share price growth, Knorr-Bremse actually saw its earnings per share (EPS) drop 5.6% per year.
Thus, it seems unlikely that the market is focussed on EPS growth at the moment. Given this situation, it makes sense to look at other metrics too.
It may well be that Knorr-Bremse revenue growth rate of 3.4% over three years has convinced shareholders to believe in a brighter future. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder’s faith in better days ahead will be rewarded.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Knorr-Bremse is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So it makes a lot of sense to check out what analysts think Knorr-Bremse will earn in the future (free analyst consensus estimates)
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Knorr-Bremse the TSR over the last 3 years was 68%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
It’s good to see that Knorr-Bremse has rewarded shareholders with a total shareholder return of 18% in the last twelve months. That’s including the dividend. There’s no doubt those recent returns are much better than the TSR loss of 2% per year over five years. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 1 warning sign with Knorr-Bremse , and understanding them should be part of your investment process.
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on German exchanges.
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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.