Many investors define successful investing as beating the market average over the long term. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that’s been the case for longer term KAR Auction Services, Inc. (NYSE:KAR) shareholders, since the share price is down 70% in the last three years, falling well short of the market return of around 67%. The falls have accelerated recently, with the share price down 14% in the last three months.
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.
KAR Auction Services saw its share price decline over the three years in which its EPS also dropped, falling to a loss. This was, in part, due to extraordinary items impacting earnings. Since the company has fallen to a loss making position, it’s hard to compare the change in EPS with the share price change. However, we can say we’d expect to see a falling share price in this scenario.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between KAR Auction Services’ total shareholder return (TSR) and its share price return. 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. Its history of dividend payouts mean that KAR Auction Services’ TSR, which was a 16% drop over the last 3 years, was not as bad as the share price return.
A Different Perspective
KAR Auction Services shareholders are up 15% for the year. 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 4% over half a decade This could indicate that the company is winning over new investors, as it pursues its strategy. 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.