Analyze Any Stock Free


Written by: Robert and Russell Markham

Earnings Per Share (EPS) is the engine room of price appreciation. Over the years, I have been guided by EPS and benefited handsomely. But every now and then, I come across stocks where the earnings are firing up, but the stock remains stubbornly unwilling to rise in price. Therein lies an opportunity!

For years, I have watched the earnings profile (EPS) of Domino’s Pizza (DMP.AX) shine. I am not talking about the price, just the EPS. The price of DMP.AX slid from $77.00 per share on 18 August 2016 down to $36.86 per share on 6 August 2019. Over the same time, the EPS was trending up in a steady upward smooth to right direction. Since then, the EPS has continued to power on. The share price fires up in August 2019 and has continued to do so as of 22 February 2021.

Why is it that DMP.AX did not rise on rising earnings from late 2016 through early 2020? In short, the earnings results did not meet market consensus. Despite making record profits in 2017 and 2018, the share price came under pressure due to earnings results falling short of what the market had forecasted and expected. Again, therein lies the opportunity. Looking back to news items in August 2017, I came across a report entitled: “Domino’s Pizza shares go cold as record profit fails to satisfy investors.”

The report detailed some of the reasons for the sliding share price, but in the report, it was interesting to note the following:
“Domino’s Pizza share price has taken a pounding despite the fast-food business delivering a record full-year profit. Domino’s net profit of $103 million was up 25 per cent on the previous year, and underlying earnings rose 29 per cent to $118 million. However, this was below both the company’s guidance and market expectations, leading a nasty case of investor reflux as the stock came off the boil.”

Take a step back to digest this information…here we have a company making record profits year in and year out. The point I am getting at here is that we have seen time and time again…rising earnings will lead to rising share prices. Despite the market reacting over earnings expectations versus earnings outcomes…the fact remains that DMP.AX was and has been making record profits. There is only so long that a company can continue to have a rising set of earnings before the share price reflects this. Let’s drill in a bit further. In addition to EPS, you can also look at the Earning Growth Rate (GRT) for DMP.AX and add it to your VectorVest graph. Let’s start with the definition of GRT (If you right click on any given stock in Stock Viewer, you can select: View Full Stock Analysis Report to get a summary of all the definitions on the given stock parameters):

“GRT reflects a company’s one to three year forecasted earnings growth rate in percent per year.”

If you graph GRT, GRT can be trending lower, but if GRT is a positive number, it means that the earnings growth is trending higher – just not as quickly! Conversely, a rising GRT gives you notice that forecasted earnings growth rates are on the rise and the earnings are growing. If you see a negative GRT, then you need to be careful as this depicts earnings are falling and therefore no growth in earnings. DMP.AX has not been negative since 2009.

I have put together a short video on DMP.AX where I show you how between 2017 and 2018 the GRT for DMP.AX had started to pull back a fair bit. However, GRT was still positive! To be clear, I really want those smooth left to right rising EPS stocks, but I also want those companies where the GRT is holding up well. A falling GRT is not the end of the world, I am happy to have a GRT that goes from say 15% to 10%…a 10% earnings growth rate is still a very good rate. However, I am alerted to the fact that the rate of earnings is starting to slow down. The momentum of the EPS score will slow down as such, but as in the case of DMP.AX – the EPS figure still powered on since earnings were growing and positive.

Having said all this, EPS is still key! A rising EPS is what you are after, you want to see your EPS graph going up. GRT gives you that extra insight regarding the growth expected on your earnings – and I prefer a strong consistent GRT score.

On a final note, I came across a very valuable resource written a few years ago by Dr. Bart DiLiddo on GRT. Well worth a read as it gives you invaluable knowledge on GRT and what goes into a lot of detail behind the mechanics and power of GRT:

Please CLICK HERE to see this week’s video!

I have enclosed a set of links on some of the articles I researched when compiling the Essay that you will find of interest if you wish to investigate further.                                                                                                                        

Leave a Reply

Your email address will not be published. Required fields are marked *