Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, the InterContinental Hotels Group PLC (LON:IHG) share price is up 28% in the last 5 years, clearly besting the market return of around 13% (ignoring dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 4.4% in the last year.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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.
We know that InterContinental Hotels Group has been profitable in the past. On the other hand, it reported a trailing twelve months loss, suggesting it isn’t reliably profitable. So we might find other metrics can better explain the share price movements.
The revenue reduction of 0.7% per year is not a positive. It certainly surprises us that the share price is up, but perhaps a closer examination of the data will yield answers.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. So we recommend checking out this free report showing consensus forecasts
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between InterContinental Hotels Group’s total shareholder return (TSR) and its share price change, which we’ve covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. InterContinental Hotels Group’s TSR of 48% for the 5 years exceeded its share price return, because it has paid dividends.
A Different Perspective
InterContinental Hotels Group provided a TSR of 4.4% over the last twelve months. But that return falls short of the market. It’s probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 8% over five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. 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. Case in point: We’ve spotted 2 warning signs for InterContinental Hotels Group you should be aware of, and 1 of them shouldn’t be ignored.
But note: InterContinental Hotels Group may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.
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.
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