Earnings grew faster than the notable 8.9% CAGR delivered to Progress Software (NASDAQ:PRGS) shareholders over the last five years

By
Simply Wall St
Published
January 10, 2022
NasdaqGS:PRGS
Source: Shutterstock

The main point of investing for the long term is to make money. But more than that, you probably want to see it rise more than the market average. But Progress Software Corporation (NASDAQ:PRGS) has fallen short of that second goal, with a share price rise of 41% over five years, which is below the market return. Zooming in, the stock is actually down 3.6% in the last year.

In light of the stock dropping 5.5% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.

Check out our latest analysis for Progress Software

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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, Progress Software achieved compound earnings per share (EPS) growth of 61% per year. This EPS growth is higher than the 7% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

earnings-per-share-growth
NasdaqGS:PRGS Earnings Per Share Growth January 10th 2022

We know that Progress Software has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.

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 Progress Software the TSR over the last 5 years was 53%, 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

Progress Software shareholders are down 2.1% for the year (even including dividends), but the market itself is up 15%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 9% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It's always interesting to track share price performance over the longer term. But to understand Progress Software better, we need to consider many other factors. Case in point: We've spotted 2 warning signs for Progress Software you should be aware of.

Of course Progress Software may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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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