Quanex’s 38.9% return over the past six months has outpaced the S&P 500 by 36.3%, and its stock price has climbed to $19.75 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Quanex, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Quanex Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Quanex for now. Here are three reasons there are better opportunities than NX and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Analyzing the trend in its profitability, Quanex’s operating margin decreased by 17.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Quanex’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 10%.
2. EPS Barely Growing
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.
Quanex’s EPS grew at an unimpressive 7.5% compounded annual growth rate over the last five years, lower than its 15.8% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
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, Quanex’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Quanex’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 10.2× forward P/E (or $19.75 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Quanex
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