Shareholders of NN would probably like to forget the past six months even happened. The stock dropped 20.4% and now trades at $2.30. This might have investors contemplating their next move.
Is now the time to buy NN, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think NN Will Underperform?
Despite the more favorable entry price, we're swiping left on NN for now. Here are three reasons why we avoid NNBR and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, NN struggled to consistently increase demand as its $433.7 million of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.
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.
NN’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 1.7%, meaning it lit $1.66 of cash on fire for every $100 in revenue.
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. Over the last few years, NN’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
NN falls short of our quality standards. After the recent drawdown, the stock trades at 65.7× forward P/E (or $2.30 per share). This valuation tells us a lot of optimism 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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