Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Leonardo S.p.a. (BIT:LDO) share price is up 42% in the last 5 years, clearly besting than the market return of around -34% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 6.6%, including dividends.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 five years of share price growth, Leonardo moved from a loss to profitability. That’s generally thought to be a genuine positive, so we would expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it’s worth taking a look at the returns in the last three years, too. In fact, the Leonardo stock price is 11% lower in the last three years. During the same period, EPS grew by 23% each year. It would appear there’s a real mismatch between the increasing EPS and the share price, which has declined -3.8% a year for three years.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that Leonardo has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Leonardo the TSR over the last 5 years was 45%, 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’re pleased to report that Leonardo shareholders have received a total shareholder return of 6.6% over one year. That’s including the dividend. However, that falls short of the 7.8% TSR per annum it has made for shareholders, each year, over five years. Before deciding if you like the current share price, check how Leonardo scores on these 3 valuation metrics.
But note: Leonardo 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 IT exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.