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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, the Mainfreight Limited (NZSE:MFT) share price is up 77% in the last 5 years, clearly besting the market decline of around 7.9% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 12%, including dividends.
In light of the stock dropping 4.4% 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.
See our latest analysis for Mainfreight
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, Mainfreight achieved compound earnings per share (EPS) growth of 8.7% per year. This EPS growth is slower than the share price growth of 12% per year, over the same period. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. This free interactive report on Mainfreight's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Mainfreight, it has a TSR of 97% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's good to see that Mainfreight has rewarded shareholders with a total shareholder return of 12% in the last twelve months. And that does include the dividend. Having said that, the five-year TSR of 15% a year, is even better. It's always interesting to track share price performance over the longer term. But to understand Mainfreight better, we need to consider many other factors. Case in point: We've spotted 1 warning sign for Mainfreight you should be aware of.