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While Advanced Drainage Systems, Inc. (NYSE:WMS) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 12% in the last quarter. But that does not change the realty that the stock's performance has been terrific, over five years. Indeed, the share price is up a whopping 440% in that time. So we don't think the recent decline in the share price means its story is a sad one. The most important thing for savvy investors to consider is whether the underlying business can justify the share price gain.
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
View our latest analysis for Advanced Drainage Systems
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. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During five years of share price growth, Advanced Drainage Systems achieved compound earnings per share (EPS) growth of 36% per year. This EPS growth is reasonably close to the 40% average annual increase in the share price. This indicates that investor sentiment towards the company has not changed a great deal. Rather, the share price has approximately tracked EPS growth.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It is of course excellent to see how Advanced Drainage Systems has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Advanced Drainage Systems' financial health with this free report on its balance sheet.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Advanced Drainage Systems' TSR for the last 5 years was 484%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's nice to see that Advanced Drainage Systems shareholders have received a total shareholder return of 12% over the last year. That's including the dividend. However, the TSR over five years, coming in at 42% per year, is even more impressive. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Advanced Drainage Systems , and understanding them should be part of your investment process.