L.B. Foster has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.9%. The stock now trades at $28.41, marking a 19.3% gain. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in L.B. Foster, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is L.B. Foster Not Exciting?
We’re happy investors have made money, but we're cautious about L.B. Foster. Here are three reasons there are better opportunities than FSTR and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, L.B. Foster struggled to consistently increase demand as its $507.8 million 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 lacking business quality.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for L.B. Foster, its EPS declined by 31.4% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
L.B. Foster historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.4%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
L.B. Foster isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 8.5× forward EV-to-EBITDA (or $28.41 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.
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