Tencent Music Entertainment Group (NYSE:TME) shareholders might be concerned after seeing the share price drop 15% in the last month. But that doesn’t change the fact that the returns over the last three years have been spectacular. In fact, the share price has taken off in that time, up 484%. As long term investors the recent fall doesn’t detract all that much from the longer term story. The only way to form a view of whether the current price is justified is to consider the merits of the business itself.
With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
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To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
Tencent Music Entertainment Group was able to grow its EPS at 57% per year over three years, sending the share price higher. In comparison, the 80% per year gain in the share price outpaces the EPS growth. This indicates that the market is feeling more optimistic on the stock, after the last few years of progress. It’s not unusual to see the market ‘re-rate’ a stock, after a few years of growth.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It is of course excellent to see how Tencent Music Entertainment Group has grown profits over the years, but the future is more important for shareholders. This free interactive report on Tencent Music Entertainment Group’s balance sheet strength is a great place to start, if you want to investigate the stock further.
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. In the case of Tencent Music Entertainment Group, it has a TSR of 496% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!