The total return for PriceSmart (NASDAQ:PSMT) investors has risen faster than earnings growth over the last three years
By buying an index fund, you can roughly match the market return with ease. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, the PriceSmart, Inc. (NASDAQ:PSMT) share price is up 44% in the last three years, clearly besting the market return of around 34% (not including dividends).
Although PriceSmart has shed US$76m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
View our latest analysis for PriceSmart
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 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).
PriceSmart was able to grow its EPS at 10% per year over three years, sending the share price higher. We note that the 13% yearly (average) share price gain isn't too far from the EPS growth rate. Coincidence? Probably not. This suggests that sentiment and expectations have not changed drastically. Au contraire, the share price change has arguably mimicked the EPS growth.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We know that PriceSmart 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. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for PriceSmart 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
The total return of 11% received by PriceSmart shareholders over the last year isn't far from the market return of -12%. So last year was actually even worse than the last five years, which cost shareholders 1.8% per year. It will probably take a substantial improvement in the fundamental performance for the company to reverse this trend. 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. For instance, we've identified 1 warning sign for PriceSmart that you should be aware of.
Of course PriceSmart may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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.
