Hardwoods Distribution's (TSE:HDI) earnings growth rate lags the 36% CAGR delivered to shareholders

By
Simply Wall St
Published
May 12, 2022
TSX:HDI
Source: Shutterstock

The last three months have been tough on Hardwoods Distribution Inc. (TSE:HDI) shareholders, who have seen the share price decline a rather worrying 34%. But that doesn't change the fact that the returns over the last three years have been very strong. In three years the stock price has launched 140% higher: a great result. It's not uncommon to see a share price retrace a bit, after a big gain. The fundamental business performance will ultimately dictate whether the top is in, or if this is a stellar buying opportunity.

While this past week has detracted from the company's three-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

Check out our latest analysis for Hardwoods Distribution

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.

Hardwoods Distribution was able to grow its EPS at 59% per year over three years, sending the share price higher. The average annual share price increase of 34% is actually lower than the EPS growth. So one could reasonably conclude that the market has cooled on the stock. We'd venture the lowish P/E ratio of 5.44 also reflects the negative sentiment around the stock.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

earnings-per-share-growth
TSX:HDI Earnings Per Share Growth May 12th 2022

It is of course excellent to see how Hardwoods Distribution has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Hardwoods Distribution, it has a TSR of 153% 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

Investors in Hardwoods Distribution had a tough year, with a total loss of 12% (including dividends), against a market gain of about 7.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 12% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It's always interesting to track share price performance over the longer term. But to understand Hardwoods Distribution better, we need to consider many other factors. For instance, we've identified 4 warning signs for Hardwoods Distribution (2 make us uncomfortable) that you should be aware of.

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 CA exchanges.

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