Regal Rexnord (NYSE:RRX) delivers shareholders decent 13% CAGR over 5 years, surging 6.8% in the last week alone

While Regal Rexnord Corporation (NYSE:RRX) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 23% in the last quarter. But at least the stock is up over the last five years. Unfortunately its return of 66% is below the market return of 86%.

Since the stock has added US$525m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Check out our latest analysis for Regal Rexnord

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Regal Rexnord's earnings per share are down 5.3% per year, despite strong share price performance over five years. This was, in part, due to extraordinary items impacting earning in the last twelve months.

This means it's unlikely the market is judging the company based on earnings growth. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

We doubt the modest 1.1% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 12% per year is probably viewed as evidence that Regal Rexnord is growing, a real positive. 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).

It's good to see that there was some significant insider buying in the last three months. That's a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. So it makes a lot of sense to check out what analysts think Regal Rexnord will earn in the future (free profit forecasts).

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Regal Rexnord the TSR over the last 5 years was 85%, 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

Regal Rexnord shareholders gained a total return of 3.5% during the year. Unfortunately this falls short of the market return. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 13% over five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. 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 Regal Rexnord 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 American 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.