Siemens Healthineers Just Smashed Records - Here's What's Next for SHL

Stock pickers are generally looking for stocks that will outperform the broader market. Buying under-rated businesses seems like a good way to do this, as they can potentially deliver better returns in the long run due to the initial low valuation and potentially high growth. Since many investors are highly attuned to this idea, it might seem strange that even the stock market itself is often overlooked as a source of information for stock investing.

Given that stock market prices are set by investors' expectations of the future, one can argue that investors ought to be able to learn something about a company's future prospects from its current stock price. When used properly, this source of information can help investors pick stocks that have better potential returns than the average ones in the market. A great example of an overlooked source of information for public companies is the relationship between the total return of an investment and the underlying growth of its earnings over time. Many investors are so focused on what they think will happen in the future that they overlook the important lesson regarding the company they can deduce from the overall return on the one hand and earnings per share growth on the other.

As many of the investors track the change in the market value of their total return over time by looking at net changes or setting specific values that could get exceeded in day-to-day periods, one often important comparison investors use in determining the performance of their investments is whether the growth of underlying earnings per share over the past year, several past years, or ten years matches the change in market value of their total return for the same periods. And then one of the questions these investors pose for themselves is about what possibly accounts for the difference in growth between the two, knowing of course that no business continues along linear progression forever.

We shall be focusing on a somewhat unfamiliar European company named Siemens Healthineers, which has produced a considerable return on capital of 21% over the past five years. And the stock (ETR:SHL) has in fact seen its total return rise much faster than its earnings growth over the last five years. Given the size and the maturity of the business, the total market value of the stock of Siemens Healthineers largely moved over time with its growth in profitability.

Looking back over five years, net income for Siemens Healthineers struggled to find much growth, averaging only about 7% per year. Over the same period, the stock price of Siemens Healthineers has seen an uplift of an average of about 15% per year - an enormous outperformance when compared to the company’s average yearly growth in profitability. While this may seem a very promising growth trend to some, we think investors could certainly benefit from an in-depth analysis of growth metrics to get a better sense of the viability of investment for the ETR: SHL. In particular, these investors could pay special attention to how much its underlying average earnings growth trails or exceeds its total return. Let’s analyze why we believe the ETR: SHL has so outperformed during the recent years in terms of total returns.

Sometimes this difference implies that investors have simply started to value the earnings much more richly than before, either through recognizing the increase in growth already experienced or expecting such growth to be better in the future. For this scenario, one should definitely expect to see this difference reflected in higher multiples for the price to earnings ratio. Indeed, this growth in profitability was quite apparent, as evidenced by the rising stock price of the said conglomerate. We believe the total return for SHL was almost twice as high as the average yearly growth in profitability between 2018 and 2023. Furthermore, our analysis led us to believe the difference over the last five years at Siemens Healthineers is largely due to investors simply starting to value its market capitalization and overall underlying earnings much richer than they initially were at the beginning of our evaluation timeframe.