RUM Group has been on fire lately. In the past six months alone, the company’s stock price has rocketed 69.1%, reaching $8.93 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy RUM Group, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is RUM Group Not Exciting?
Despite the momentum, we don’t have much confidence in RUM Group. Here are three reasons why RUM doesn’t excite us, plus one stock we’d rather own.
1. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
RUM Group’s earnings losses deepened over the last three years as its EPS dropped 167% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.
2. Cash Burn Ignites Concerns
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.
RUM Group’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 111%, meaning it lit $110.73 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
RUM Group burned through $153.1 million of cash over the last year, and its $501.8 million of debt exceeds the $203.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the RUM Group’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of RUM Group until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
RUM Group isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 48.7× forward EV-to-EBITDA (or $8.93 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of RUM Group
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