When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term freenet AG (ETR:FNTN) shareholders have enjoyed a 51% share price rise over the last half decade, well in excess of the market return of around 2.1% (not including dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 30%, including dividends.
Let’s take a look at the underlying fundamentals over the longer term, and see if they’ve been consistent with shareholders returns.
See our latest analysis for freenet
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During five years of share price growth, freenet achieved compound earnings per share (EPS) growth of 4.0% per year. This EPS growth is lower than the 9% average annual increase in the share price. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. That’s not necessarily surprising considering the five-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 freenet has improved its bottom line lately, but is it going to grow revenue? If you’re interested, you could check this free report showing consensus revenue forecasts.
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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 freenet the TSR over the last 5 years was 100%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
It’s nice to see that freenet shareholders have received a total shareholder return of 30% over the last year. That’s including the dividend. That gain is better than the annual TSR over five years, which is 15%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It’s always interesting to track share price performance over the longer term. But to understand freenet better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we’ve spotted 1 warning sign for freenet you should know about.
