Earnings are growing at KWS SAAT SE KGaA (ETR:KWS) but shareholders still don't like its prospects

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. Unfortunately, that's been the case for longer term KWS SAAT SE & Co. KGaA (ETR:KWS) shareholders, since the share price is down 35% in the last three years, falling well short of the market decline of around 7.8%.

If the past week is anything to go by, investor sentiment for KWS SAAT SE KGaA isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

See our latest analysis for KWS SAAT SE KGaA

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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Although the share price is down over three years, KWS SAAT SE KGaA actually managed to grow EPS by 0.8% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

It looks to us like the market was probably too optimistic around growth three years ago. But it's possible a look at other metrics will be enlightening.

The modest 1.9% dividend yield is unlikely to be guiding the market view of the stock. We note that, in three years, revenue has actually grown at a 13% annual rate, so that doesn't seem to be a reason to sell shares. This analysis is just perfunctory, but it might be worth researching KWS SAAT SE KGaA more closely, as sometimes stocks fall unfairly. This could present an opportunity.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for KWS SAAT SE KGaA the TSR over the last 3 years was -32%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 5.2% in the last year, KWS SAAT SE KGaA shareholders lost 18% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 3% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. It's always interesting to track share price performance over the longer term. But to understand KWS SAAT SE KGaA better, we need to consider many other factors. For example, we've discovered 2 warning signs for KWS SAAT SE KGaA (1 is significant!) that you should be aware of before investing here.

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.