Keppel Corporation Limited’s Shares Have Fallen by 23% in 1 Year: Here’s What Happened

Shares of marine engineering and property development conglomerate Keppel Corporation Limited (SGX: BN4) have fallen by 23% in price over the last 12 months.

What has happened?

A simple framework

To help answer the question above, 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, a stock’s price returns can be made out entirely of the investment return component, entirely of the speculative return component, or a mixture of both components.

For the Foolish investor, understanding the reason for a stock’s price movement is important. If we can determine the reason, we may get an inkling on whether the movement is deserved or undeserved and thus act accordingly.

Deciphering the fall  

We can track the investment or speculative components of a stock’s return by noting down changes in its financial metrics such as its earnings per share (EPS) and price to earnings ratio (PE ratio). On a related side note, such notes 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.

Coming back to Keppel Corp, I have summarised changes in the company’s EPS, PE ratio, and share price over the past year in the table below:

Source: Google Finance; company’s earnings report

There is a stark contrast between changes in Keppel Corp’s EPS and PE ratio. The conglomerate’s EPS has been slashed by 37.4% compared to a year ago but its PE ratio had shot up by some 23.5% over the same period. This could be a sign of the market becoming more enthusiastic about the company’s prospects over the past year.

The latest reporting quarter (quarter ended 30 June 2016) for Keppel Corp did not show much signs of growth.

The company’s quarterly revenue slumped by 36.6% year-on-year while its profit was almost halved. The company also ended the quarter with a net debt position of around S$7.33 billion, up significantly from S$5.05 billion a year ago.

Keppel Corp cut its interim dividend as well from S$0.12 per share a year ago to S$0.08 per share. Growth was seen in the company’s operating cash flow, which improved from a negative S$556 million a year ago to a negative S$7.2 million.

Things are not expected to improve in the near term. Keppel Corporation’s management believes that it “must be prepared for not only a long winter, but a harsh one.”

Foolish takeaway

If a stock’s price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (or decline), or whether it is simply a result of investor exuberance (or 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 something that happened as a result of the market’s irrationality. Such knowledge can help us with 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.