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. We regret to report that long term Australian Pharmaceutical Industries Limited (ASX:API) shareholders have had that experience, with the share price dropping 41% in three years, versus a market return of about -6.2%. Furthermore, it’s down 10% in about a quarter. That’s not much fun for holders. Of course, this share price action may well have been influenced by the 28% decline in the broader market, throughout the period.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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 unfortunate three years of share price decline, Australian Pharmaceutical Industries actually saw its earnings per share (EPS) improve by 1.9% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. 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.
Given the healthiness of the dividend payments, we doubt that they’ve concerned the market. Australian Pharmaceutical Industries has maintained its top line over three years, so we doubt that has shareholders worried. A closer look at revenue and profit trends might yield insights.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
We know that Australian Pharmaceutical Industries has improved its bottom line lately, but what does the future have in store? So it makes a lot of sense to check out what analysts think Australian Pharmaceutical Industries will earn in the future (free profit forecasts).
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. As it happens, Australian Pharmaceutical Industries’s TSR for the last 3 years was -32%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Although it hurts that Australian Pharmaceutical Industries returned a loss of 14% in the last twelve months, the broader market was actually worse, returning a loss of 17%. Unfortunately, last year’s performance may indicate unresolved challenges, given that it’s worse than the annualised loss of 3.9% over the last half decade. Whilst Baron Rothschild does tell the investor “buy when there’s blood in the streets, even if the blood is your own”, buyers would need to examine the data carefully to be comfortable that the business itself is sound. 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. For instance, we’ve identified 3 warning signs for Australian Pharmaceutical Industries (2 are potentially serious) that you should be aware of.
But note: Australian Pharmaceutical Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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