Discovery (JSE:DSY) stock performs better than its underlying earnings growth over last three years

By buying an index fund, you can roughly match the market return with ease. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, Discovery Limited (JSE:DSY) shareholders have seen the share price rise 93% over three years, well in excess of the market return (42%, not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 20% in the last year, including dividends.

After a strong gain in the past week, it’s worth seeing if longer term returns have been driven by improving fundamentals.

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While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.

Discovery was able to grow its EPS at 19% per year over three years, sending the share price higher. This EPS growth is lower than the 24% average annual increase in the share price. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That’s not necessarily surprising considering the three-year track record of earnings growth.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Discovery has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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 Discovery, it has a TSR of 98% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

Discovery provided a TSR of 20% over the last twelve months. Unfortunately this falls short of the market return. On the bright side, that’s still a gain, and it’s actually better than the average return of 10% over half a decade It is possible that returns will improve along with the business fundamentals. Before spending more time on Discovery it might be wise to click here to see if insiders have been buying or selling shares.

We will like Discovery 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 South African 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.