It might be of some concern to shareholders to see the McMillan Shakespeare Limited (ASX:MMS) share price down 13% in the last month. On the other hand the share price is higher than it was three years ago. However, it’s unlikely many shareholders are elated with the share price gain of 15% over that time, given the rising market.
In light of the stock dropping 6.7% 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 three-year return.
View our latest analysis for McMillan Shakespeare
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 three years of share price growth, McMillan Shakespeare achieved compound earnings per share growth of 18% per year. This EPS growth is higher than the 5% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock. This cautious sentiment is reflected in its (fairly low) P/E ratio of 11.59.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that McMillan Shakespeare 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?
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 McMillan Shakespeare the TSR over the last 3 years was 48%, 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
While the broader market gained around 15% in the last year, McMillan Shakespeare shareholders lost 2.6% (even including dividends). 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 5% per year over half a decade. 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 McMillan Shakespeare better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we’ve spotted 3 warning signs for McMillan Shakespeare you should know about.
Story continues
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Australian 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.
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