Mandarin Oriental International Limited’s Shares Have Fallen 13% in A Year: What’s Going On?

Hotel management group Mandarin Oriental International Limited (SGX: M04) has seen its shares fall by 13% over the past 12 months. What has happened here? Let’s find out.

A simple framework

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 the stock 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  

We can track the reasons for Mandarin Oriental’s stock price movement by noting down simple but important financial metrics like the firm’s 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 any company over time and can form part of your investment journal entries.

Here’s how Mandarin Oriental’s EPS, PE ratio, and stock price have changed compared to a year ago:

Mandarin Oriental EPS, PE, Stock Price (22 October 2015)

Source: Google Finance; earnings report

From the table above, we can observe how the decline in Mandarin Oriental’s shares can be traced back to a fall in both its EPS and PE ratio.

Mandarin Oriental’s latest quarter was a tough one. The hotel management group saw both its revenue and earnings decline sharply by 13.4% and 29% respectively. The company’s premium hotels business was affected by softer demand in Hong Kong and Paris.

Despite the challenging outlook, shares of Mandarin Oriental can be considered to be trading at a premium to the broader market. For perspective, the PE ratio for the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – stands at 12 at the moment.

Foolish takeaway

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.