Stock Analysis

Would Shareholders Who Purchased NEXT's(LON:NXT) Stock Five Years Be Happy With The Share price Today?

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LSE:NXT
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While it may not be enough for some shareholders, we think it is good to see the NEXT plc (LON:NXT) share price up 10% in a single quarter. But over the last half decade, the stock has not performed well. In fact, the share price is down 35%, which falls well short of the return you could get by buying an index fund.

See our latest analysis for NEXT

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During the unfortunate half decade during which the share price slipped, NEXT actually saw its earnings per share (EPS) improve by 2.0% per year. 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). Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.

By glancing at these numbers, we'd posit that the the market had expectations of much higher growth, five years ago. Having said that, we might get a better idea of what's going on with the stock by looking at other metrics.

Revenue is actually up 0.8% over the time period. A more detailed examination of the revenue and earnings may or may not explain why the share price languishes; there could be an opportunity.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

earnings-and-revenue-growth
LSE:NXT Earnings and Revenue Growth July 22nd 2020

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. This free report showing analyst forecasts should help you form a view on NEXT

What about the Total Shareholder Return (TSR)?

Investors should note that there's a difference between NEXT's total shareholder return (TSR) and its share price change, which we've covered above. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. NEXT's TSR of was a loss of 21% for the 5 years. That wasn't as bad as its share price return, because it has paid dividends.

A Different Perspective

While it's certainly disappointing to see that NEXT shares lost 7.2% throughout the year, that wasn't as bad as the market loss of 9.9%. Unfortunately, last year's performance may indicate unresolved challenges, given that it's worse than the annualised loss of 3.8% over the last half decade. While some investors do well specializing in buying companies that are struggling (but nonetheless undervalued), don't forget that Buffett said that 'turnarounds seldom turn'. 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. To that end, you should be aware of the 1 warning sign we've spotted with NEXT .

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

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