SMA Solar Technology AG (ETR:S92) shareholders might be concerned after seeing the share price drop 16% in the last quarter. But that scarcely detracts from the really solid long term returns generated by the company over five years. In fact, the share price is 107% higher today. Generally speaking the long term returns will give you a better idea of business quality than short periods can. Of course, that doesn’t necessarily mean it’s cheap now. Unfortunately not all shareholders will have held it for the long term, so spare a thought for those caught in the 43% decline over the last twelve months.
In light of the stock dropping 4.5% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company’s positive five-year return.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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 last half decade, SMA Solar Technology became profitable. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. 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 SMA Solar Technology share price has gained 11% in three years. During the same period, EPS grew by 77% each year. This EPS growth is higher than the 4% average annual increase in the share price over the same three years. So you might conclude the market is a little more cautious about the stock, these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 8.19.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
XTRA:S92 Earnings Per Share Growth June 6th 2024
It is of course excellent to see how SMA Solar Technology has grown profits over the years, but the future is more important for shareholders. This free interactive report on SMA Solar Technology’s balance sheet strength is a great place to start, if you want to investigate the stock further.
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. As it happens, SMA Solar Technology’s TSR for the last 5 years was 110%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
While the broader market gained around 7.8% in the last year, SMA Solar Technology shareholders lost 42% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn’t be so upset, since they would have made 16%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. For instance, we’ve identified 2 warning signs for SMA Solar Technology that you should be aware of.
