When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Furthermore, you'd generally like to see the share price rise faster than the market Unfortunately for shareholders, while the BorgWarner Inc. (NYSE:BWA) share price is up 47% in the last five years, that's less than the market return. Some buyers are laughing, though, with an increase of 23% in the last year.
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 five years of share price growth, BorgWarner actually saw its EPS drop 5.9% per year.
This means it's unlikely the market is judging the company based on earnings growth. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.
We doubt the modest 1.4% dividend yield is attracting many buyers to the stock. On the other hand, BorgWarner's revenue is growing nicely, at a compound rate of 3.2% over the last five years. In that case, the company may be sacrificing current earnings per share to drive growth.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
BorgWarner is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for BorgWarner the TSR over the last 5 years was 60%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
BorgWarner shareholders gained a total return of 25% during the year. But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 10% per year over five year. This suggests the company might be improving over time. 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. Take risks, for example - BorgWarner has 6 warning signs we think you should be aware of.
But note: BorgWarner 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 US exchanges.
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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. 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.
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