Investors can earn very close to the average market return by buying an index fund. In contrast individual stocks will provide a wide range of possible returns, and may fall short. The AVIC Airborne Systems Co., Ltd. (SHSE:600372) is such an example; over three years its share price is down 32% versus a marketdecline of 26%.
On a more encouraging note the company has added CN¥3.5b to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 unfortunate three years of share price decline, AVIC Airborne Systems actually saw its earnings per share (EPS) improve by 3.2% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.
It's pretty reasonable to suspect the market was previously to bullish on the stock, and has since moderated expectations. Looking to other metrics might better explain the share price change.
The modest 2.0% dividend yield is unlikely to be guiding the market view of the stock. We note that, in three years, revenue has actually grown at a 44% annual rate, so that doesn't seem to be a reason to sell shares. It's probably worth investigating AVIC Airborne Systems further; while we may be missing something on this analysis, there might also be an opportunity.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. This free report showing analyst forecasts should help you form a view on AVIC Airborne Systems
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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of AVIC Airborne Systems, it has a TSR of -30% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
While it's never nice to take a loss, AVIC Airborne Systems shareholders can take comfort that , including dividends,their trailing twelve month loss of 14% wasn't as bad as the market loss of around 18%. Given the total loss of 0.7% per year over five years, it seems returns have deteriorated in the last twelve months. While some investors do well specializing in buying companies that are struggling (but nonetheless undervalued), don't forget that Buffett said that 'turnarounds seldom turn'. It's always interesting to track share price performance over the longer term. But to understand AVIC Airborne Systems better, we need to consider many other factors. Even so, be aware that AVIC Airborne Systems is showing 1 warning sign in our investment analysis , you should know about...
We will like AVIC Airborne Systems better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Chinese 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com