Over the past six months, L.B. Foster has been a great trade, beating the S&P 500 by 13.8%. Its stock price has climbed to $30.02, representing a healthy 17.3% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy L.B. Foster, 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 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. Weak Backlog Growth Points to Soft Demand
In addition to reported revenue, backlog is a useful data point for analyzing General Industrial Machinery companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into L.B. Foster’s future revenue streams.
L.B. Foster’s backlog came in at $189.3 million in the latest quarter, and over the last two years, its year-on-year growth averaged 4.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
L.B. Foster’s flat EPS over the last five years was below its 1.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
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 3.7%, 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 doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 20× forward P/E (or $30.02 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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