Atkore has had an impressive run over the past six months as its shares have beaten the S&P 500 by 22.8%. The stock now trades at $84.78, marking a 32.8% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Atkore, 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 Atkore Will Underperform?
We’re happy investors have made money, but we’re cautious about Atkore. Here are three reasons why there are better opportunities than ATKR, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Atkore’s 7.4% annualized revenue growth over the last five years was mediocre. This was below our standard for the industrials sector.
2. 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, Atkore’s margin dropped by 9.2 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Atkore’s free cash flow margin for the trailing 12 months was 5%.
3. 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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Atkore’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Atkore doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 14.6× forward P/E (or $84.78 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Like More Than Atkore
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