For many, the main point of investing in the stock market is to achieve spectacular returns. While the best companies are hard to find, but they can generate massive returns over long periods. For example, the The a2 Milk Company Limited (NZSE:ATM) share price is up a whopping 3784% in the last half decade, a handsome return for long term holders. If that doesn’t get you thinking about long term investing, we don’t know what will. Also pleasing for shareholders was the 30% gain in the last three months.
It really delights us to see such great share price performance for investors.
See our latest analysis for a2 Milk
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…’ By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the five years of share price growth, a2 Milk moved from a loss to profitability. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Since the company was unprofitable five years ago, but not three years ago, it’s worth taking a look at the returns in the last three years, too. Indeed, the a2 Milk share price has gained 525% in three years. During the same period, EPS grew by 73% each year. That makes the EPS growth rather close to the annualized share price gain of 84% over the same period. So you could reasonably conclude that investor sentiment towards the stock has remained pretty steady, over time. Arguably the share price is reflecting the earnings per share.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
NZSE:ATM Past and Future Earnings April 19th 2020We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. It might be well worthwhile taking a look at our freereport on a2 Milk’s earnings, revenue and cash flow.
A Different Perspective
It’s good to see that a2 Milk has rewarded shareholders with a total shareholder return of 26% in the last twelve months. However, that falls short of the 108% TSR per annum it has made for shareholders, each year, over five years. Potential buyers might understandably feel they’ve missed the opportunity, but it’s always possible business is still firing on all cylinders. 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 a2 Milk is showing 1 warning sign in our investment analysis, you should know about…
If you would prefer to check out another company — one with potentially superior financials — then do not miss this freelist 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 NZ exchanges.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
