What a time it’s been for CTS. In the past six months alone, the company’s stock price has increased by a massive 46.2%, setting a new 52-week high of $61.90 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in CTS, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is CTS Not Exciting?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why CTS doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, CTS’s 4.3% annualized revenue growth over the last five years was mediocre. This was below our standard for the business services sector.
2. Fewer Distribution Channels Limit its Ceiling
With $554.8 million in revenue over the past 12 months, CTS is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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, CTS’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
CTS isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 26.1× forward P/E (or $61.90 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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