A. O. Smith's (NYSE:AOS) earnings growth rate lags the 8.2% CAGR delivered to shareholders
While A. O. Smith Corporation (NYSE:AOS) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 17% in the last quarter. In contrast the stock is up over the last three years. Arguably you'd have been better off buying an index fund, because the gain of 20% in three years isn't amazing.
Although A. O. Smith has shed US$535m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
See our latest analysis for A. O. Smith
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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During three years of share price growth, A. O. Smith achieved compound earnings per share growth of 6.0% per year. This EPS growth is remarkably close to the 6% average annual increase in the share price. That suggests that the market sentiment around the company hasn't changed much over that time. Au contraire, the share price change has arguably mimicked the EPS growth.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It's good to see that there was some significant insider buying in the last three months. That's a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. Dive deeper into the earnings by checking this interactive graph of A. O. Smith's earnings, revenue and cash flow.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of A. O. Smith, it has a TSR of 27% for the last 3 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
While it's certainly disappointing to see that A. O. Smith shares lost 3.6% throughout the year, that wasn't as bad as the market loss of 7.2%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 5% for each year. In the best case scenario the last year is just a temporary blip on the journey to 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. Even so, be aware that A. O. Smith is showing 1 warning sign in our investment analysis , you should know about...
A. O. Smith is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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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.
