Buying a low-cost index fund will get you the average market return. But if you invest in individual stocks, some are likely to underperform. That’s what has happened with the Frontdoor, Inc. (NASDAQ:FTDR) share price. It’s up 24% over three years, but that is below the market return. In the last year the stock has gained 7.7%.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
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.
Over the last three years, Frontdoor failed to grow earnings per share, which fell 15% (annualized).
So we doubt that the market is looking to EPS for its main judge of the company’s value. Given this situation, it makes sense to look at other metrics too.
It may well be that Frontdoor revenue growth rate of 8.1% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
Frontdoor is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So it makes a lot of sense to check out what analysts think Frontdoor will earn in the future (free analyst consensus estimates)
A Different Perspective
Over the last year Frontdoor shareholders have received a TSR of 7.7%. It’s always nice to make money but this return falls short of the market return which was about 33% for the year. On the other hand, the TSR over three years was worse, at just 7% per year. This suggests the company’s position is improving. If the business can justify the share price gain with improving fundamental data, then there could be more gains to come. 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. Even so, be aware that Frontdoor is showing 3 warning signs in our investment analysis , you should know about…
Of course Frontdoor may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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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