Universal Logistics’s 21.1% return over the past six months has outpaced the S&P 500 by 8%, and its stock price has climbed to $19.59 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Universal Logistics, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Universal Logistics Will Underperform?

We’re happy investors have made money, but we’re cautious about Universal Logistics. Here are three reasons you should be careful with ULH, plus one stock we’d rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Universal Logistics struggled to consistently increase demand as its $1.53 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

Over the last few years, Universal Logistics’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Universal Logistics’s $692.6 million of debt exceeds the $20.31 million of cash on its balance sheet. Furthermore, its 20× net-debt-to-EBITDA ratio (based on its EBITDA of $33.7 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Universal Logistics could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Universal Logistics can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Universal Logistics falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 19.3× forward P/E (or $19.59 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.

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