MDU Resources has been treading water for the past six months, holding steady at $20.30. The stock also fell short of the S&P 500’s 13.1% gain during that period.
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Why Do We Think MDU Resources Will Underperform?
We’re passing on MDU Resources for now. Here are three reasons you should be careful with MDU, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. MDU Resources struggled to consistently generate demand over the last five years as its sales dropped at a 20.1% annual rate. This was below our standards and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for MDU Resources, its EPS and revenue declined by 8.4% and 20.1% annually over the last five 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 17.7 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 21.1%.
Final Judgment
MDU Resources doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 20.1× forward P/E (or $20.30 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 recommend looking at our favorite semiconductor picks and shovels play.
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