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It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But in contrast you can make much more than 100% if the company does well. For instance the TransDigm Group Incorporated (NYSE:TDG) share price is 108% higher than it was three years ago. That sort of return is as solid as granite. The last week saw the share price soften some 1.9%.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
See our latest analysis for TransDigm Group
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.
TransDigm Group was able to grow its EPS at 33% per year over three years, sending the share price higher. We note that the 28% yearly (average) share price gain isn't too far from the EPS growth rate. Coincidence? Probably not. This observation indicates that the market's attitude to the business hasn't changed all that much. Au contraire, the share price change has arguably mimicked the EPS growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that TransDigm Group has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling TransDigm Group stock, you should check out this FREE detailed report on its balance sheet.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for TransDigm Group the TSR over the last 3 years was 134%, 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
It's nice to see that TransDigm Group shareholders have received a total shareholder return of 25% over the last year. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 18%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Even so, be aware that TransDigm Group is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...