Casino and resort operator Genting Singapore PLC (SGX: G13) has seen its shares fall by a steep 28% over the past year. Does the fall make any sense? A simple framework for understanding stock price movements There can be good reasons as well as poor reasons for why a stock’s price moves. For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in a stock’s price is deserved or undeserved and thus act accordingly. To help with this, I would like to defer to a couple of…
Casino and resort operator Genting Singapore PLC (SGX: G13) has seen its shares fall by a steep 28% over the past year. Does the fall make any sense?
A simple framework for understanding stock price movements
There can be good reasons as well as poor reasons for why a stock’s price moves.
For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in a stock’s price is deserved or undeserved and thus act accordingly.
To help with this, I would like to defer to a couple of paragraphs from The Little Book that Builds Wealth by author and fund manager Pat Dorsey:
“Over long stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes in the price-earnings (P/E) ratio.
Think of the investment return as reflecting a company’s financial performance, and the speculative return as reflecting the exuberance or pessimism of other investors.”
Under Dorsey’s framework, stock price returns can be from the deserved-end of the spectrum (investment return), the undeserved-end of the spectrum (speculative return), or anywhere in between.
Deciphering the fall
To gain some understanding of Genting Singapore’s price decline, we can track changes in simple but important financial metrics like its earnings per share (EPS) and price to earnings (PE ratio); these numbers could also be a simple way for you to track the progress of a company over time and can form part of your investment journal entries.
The table below illustrates how Genting Singapore’s EPS, PE ratio, and stock price have changed compared to a year ago:
Source: Google Finance; Earnings Report
As you can tell, a sharply lower EPS has been the predominant factor in pushing shares of Genting Singapore’s stock price down by nearly 28% over the last 12 months. With the big reduction in earnings, Genting Singapore’s lower share price does seem warranted.
The company, which owns an iconic Singapore tourism landmark, the Resorts World Sentosa, had recorded a loss of S$16.9 million in its most recent quarter (the three months ended 30 June 2015) with revenue cratering by 23%.
Lower gaming revenue was the big culprit there. Genting Singapore’s management team had opined that the poor top-line showing was due to an unfavourable global VIP premium business amidst a weak environment for the gaming industry.
On a brighter note though, Genting Singapore still maintains a solid balance sheet. As of 30 June 2015, it had S$4.4 billion in cash & equivalents and just S$1.7 billion in debt.
Genting Singapore’s shares are currently valued – with a PE ratio of 41.3 – at a premium to the broader market. To that point, the PE ratio of the SPDR STI ETF (SGX: ES3), an ETF that mimics the fundamentals of the Straits Times Index (SGX: ^STI), is less than 12 at the moment.
If a stock price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (decline), or whether it is simply a result of investor exuberance (pessimism).
When we understand the difference, we may become a better judge on whether a stock’s price gains (losses) are justified – with commensurate growth (decline) in earnings – or had happened because of the market’s irrationality. Such knowledge can then aid us in our decision making.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.