Northwest Pipe has had an impressive run over the past six months as its shares have beaten the S&P 500 by 15%. The stock now trades at $50.29, marking a 27.9% gain. 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 Northwest Pipe, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
We’re happy investors have made money, but we don't have much confidence in Northwest Pipe. Here are three reasons why NWPX doesn't excite us and a stock we'd rather own.
Why Do We Think Northwest Pipe Will Underperform?
Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ:NWPX) is a manufacturer of pipeline systems for water infrastructure.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Northwest Pipe’s recent history shows its demand slowed significantly as its annualized revenue growth of 3.2% over the last two years is well below its five-year trend. 
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Northwest Pipe, its EPS declined by 3.8% annually over the last two years while its revenue grew by 3.2%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Northwest Pipe’s margin dropped by 16.9 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Northwest Pipe’s free cash flow margin for the trailing 12 months was 1.3%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Northwest Pipe, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 17.1× forward price-to-earnings (or $50.29 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
Stocks We Would Buy Instead of Northwest Pipe
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