What a fantastic six months it’s been for Matson. Shares of the company have skyrocketed 57.9%, hitting $196.13. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Matson, 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 Is Matson Not Exciting?
Despite the momentum, we’re cautious about Matson. Here are three reasons you should be careful with MATX, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
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. Regrettably, Matson’s sales grew at a tepid 5.2% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Matson’s margin dropped by 13.2 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Matson’s free cash flow margin for the trailing 12 months was 5.1%.
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).
Unfortunately, Matson’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
Matson isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 13.9× forward P/E (or $196.13 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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