Earnings are growing at China Communications Services (HKG:552) but shareholders still don't like its prospects

It is doubtless a positive to see that the China Communications Services Corporation Limited (HKG:552) share price has gained some 33% in the last three months. But that doesn't help the fact that the three year return is less impressive. After all, the share price is down 43% in the last three years, significantly under-performing the market.

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

Check out our latest analysis for China Communications Services

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.

Although the share price is down over three years, China Communications Services actually managed to grow EPS by 2.4% 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's pretty reasonable to suspect the market was previously to bullish on the stock, and has since moderated expectations. However, taking a look at other business metrics might shed a bit more light on the share price action.

Given the healthiness of the dividend payments, we doubt that they've concerned the market. We like that China Communications Services has actually grown its revenue over the last three years. But it's not clear to us why the share price is down. It might be worth diving deeper into the fundamentals, lest an opportunity goes begging.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

China Communications Services 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 China Communications Services will earn in the future (free analyst consensus estimates)

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for China Communications Services the TSR over the last 3 years was -34%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

We regret to report that China Communications Services shareholders are down 23% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 4.9%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 4% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for China Communications Services you should know about.

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 HK 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.