Did Changing Sentiment Drive Australian Pharmaceutical Industries's (ASX:API) Share Price Down By 41%?
Many investors define successful investing as beating the market average over the long term. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term Australian Pharmaceutical Industries Limited (ASX:API) shareholders have had that experience, with the share price dropping 41% in three years, versus a market return of about -0.9%. Unhappily, the share price slid 1.2% in the last week.
View our latest analysis for Australian Pharmaceutical Industries
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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, Australian Pharmaceutical Industries actually saw its earnings per share (EPS) improve by 1.9% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
It looks to us like the market was probably too optimistic around growth three years ago. However, taking a look at other business metrics might shed a bit more light on the share price action.
We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. Australian Pharmaceutical Industries has maintained its top line over three years, so we doubt that has shareholders worried. So it might be worth looking at how revenue growth over time, in greater detail.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
We know that Australian Pharmaceutical Industries has improved its bottom line lately, but what does the future have in store? If you are thinking of buying or selling Australian Pharmaceutical Industries stock, you should check out this free report showing analyst profit forecasts.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Australian Pharmaceutical Industries the TSR over the last 3 years was -32%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
While the broader market lost about 13% in the twelve months, Australian Pharmaceutical Industries shareholders did even worse, losing 16% (even including dividends) . Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 2.0% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Australian Pharmaceutical Industries (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
