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For investors with a long-term horizon, assessing earnings trend over time and against industry benchmarks is more valuable than looking at a single earnings announcement in one point in time. Investors may find my commentary, albeit very high-level and brief, on SDI Limited (ASX:SDI) useful as an attempt to give more color around how SDI is currently performing. Check out our latest analysis for SDI
Was SDI’s recent earnings decline worse than the long-term trend and the industry?
I look at data from the most recent 12 months, which either annualizes the most recent 6-month earnings update, or in some cases, the most recent annual report is already the latest available financial data. This allows me to examine different stocks in a uniform manner using new information. For SDI, its latest trailing-twelve-month earnings is AU$4.71M, which compared to last year’s level, has dropped by -28.46%. Given that these values are fairly short-term thinking, I’ve created an annualized five-year value for SDI’s earnings, which stands at AU$4.93M This doesn’t look much better, since earnings seem to have consistently been declining over time.
What could be happening here? Well, let’s look at what’s going on with margins and whether the whole industry is feeling the heat. In the past few years, revenue growth has fallen behind which implies that SDI’s bottom line has been propelled by unsustainable cost-cutting. Scanning growth from a sector-level, the Australian medical equipment industry has been enduring some headwinds over the previous twelve months, leading to an average earnings drop of -3.23%. This is a major change, given that the industry has constantly been delivering a a strong growth of 14.86% in the last five years. This shows that any recent headwind the industry is facing, it’s hitting SDI harder than its peers.
What does this mean?
Though SDI’s past data is helpful, it is only one aspect of my investment thesis. Usually companies that endure an extended period of diminishing earnings are undergoing some sort of reinvestment phase Though if the entire industry is struggling to grow over time, it may be a indicator of a structural change, which makes SDI and its peers a riskier investment. You should continue to research SDI to get a more holistic view of the stock by looking at:
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1. Financial Health: Is SDI’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
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2. Valuation: What is SDI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SDI is currently mispriced by the market.
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3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.