The five-year earnings decline is not helping Edison International's (NYSE:EIX share price, as stock falls another 7.4% in past week

September 29, 2022
  •  Updated
October 04, 2022
Source: Shutterstock

For many, the main point of investing is to generate higher returns than the overall market. But the main game is to find enough winners to more than offset the losers So we wouldn't blame long term Edison International (NYSE:EIX) shareholders for doubting their decision to hold, with the stock down 21% over a half decade. Unfortunately the share price momentum is still quite negative, with prices down 12% in thirty days. But this could be related to poor market conditions -- stocks are down 8.0% in the same time.

If the past week is anything to go by, investor sentiment for Edison International isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

Before we look at the performance, you might like to know that our analysis indicates that EIX is potentially undervalued!

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.

Edison International became profitable within the last five years. Most would consider that to be a good thing, so it's counter-intuitive to see the share price declining. Other metrics might give us a better handle on how its value is changing over time.

We note that the dividend has remained healthy, so that wouldn't really explain the share price drop. While it's not completely obvious why the share price is down, a closer look at the company's history might help explain it.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

NYSE:EIX Earnings and Revenue Growth September 29th 2022

Edison International is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Edison International in this interactive graph of future profit estimates.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Edison International's TSR for the last 5 years was -3.1%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Edison International shareholders have received a total shareholder return of 13% over the last year. That's including the dividend. Notably the five-year annualised TSR loss of 0.6% per year compares very unfavourably with the recent share price performance. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. 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 for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Edison International (at least 2 which are significant) , and understanding them should be part of your investment process.

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 US exchanges.

Valuation is complex, but we're helping make it simple.

Find out whether Edison International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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