The simplest way to invest in stocks is to buy exchange traded funds. But investors can boost returns by picking market-beating companies to own shares in. For example, the BorgWarner Inc. (NYSE:BWA) share price is up 40% in the last 1 year, clearly besting the market return of around 14% (not including dividends). That’s a solid performance by our standards! However, the stock hasn’t done so well in the longer term, with the stock only up 8.9% in three years.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
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 twelve months, BorgWarner actually shrank its EPS by 84%.
Given the share price gain, we doubt the market is measuring progress with EPS. 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.
We are skeptical of the suggestion that the 1.5% dividend yield would entice buyers to the stock. Revenue was pretty stable on last year, so deeper research might be needed to explain the share price rise.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
BorgWarner 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 BorgWarner will earn in the future (free analyst consensus estimates)
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for BorgWarner the TSR over the last 1 year was 42%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
It’s good to see that BorgWarner has rewarded shareholders with a total shareholder return of 42% in the last twelve months. Of course, that includes the dividend. That’s better than the annualised return of 7% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. Take risks, for example – BorgWarner has 4 warning signs we think you should be aware of.
We will like BorgWarner better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) 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 American 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.