MDU Resources trades at $21.32 per share and has stayed right on track with the overall market, gaining 8.3% over the last six months. At the same time, the S&P 500 has returned 4.8%.
Is there a buying opportunity in MDU Resources, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think MDU Resources Will Underperform?
We don't have much confidence in MDU Resources. Here are three reasons we avoid MDU and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, MDU Resources’s demand was weak and its revenue declined by 19.5% per year. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
MDU Resources’s full-year EPS dropped 15.9% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, MDU Resources’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, MDU Resources’s margin dropped by 13 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. MDU Resources’s free cash flow margin for the trailing 12 months was negative 15.8%.
Final Judgment
MDU Resources falls short of our quality standards. That said, the stock currently trades at 22× forward P/E (or $21.32 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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