Pulling back 3.3% this week, Open Text's NASDAQ:OTEX) five-year decline in earnings may be coming into investors focus

By
Simply Wall St
Published
February 21, 2022
NasdaqGS:OTEX
Source: Shutterstock

Open Text Corporation (NASDAQ:OTEX) shareholders might be concerned after seeing the share price drop 15% in the last quarter. But at least the stock is up over the last five years. In that time, it is up 28%, which isn't bad, but is below the market return of 99%.

While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

See our latest analysis for Open Text

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

During five years of share price growth, Open Text actually saw its EPS drop 17% 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.

On the other hand, Open Text's revenue is growing nicely, at a compound rate of 9.0% over the last five years. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.

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

earnings-and-revenue-growth
NasdaqGS:OTEX Earnings and Revenue Growth February 21st 2022

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free report showing analyst forecasts should help you form a view on Open Text

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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Open Text's TSR for the last 5 years was 39%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Open Text shareholders are down 6.7% for the year (even including dividends), but the market itself is up 1.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 7%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Open Text better, we need to consider many other factors. Case in point: We've spotted 3 warning signs for Open Text you should be aware of, and 1 of them is potentially serious.

Open Text is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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