Over the past six months, Boise Cascade has been a great trade, beating the S&P 500 by 9.5%. Its stock price has climbed to $84.00, representing a healthy 15.3% increase. 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 Boise Cascade, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Boise Cascade Will Underperform?
We’re happy investors have made money, but we're swiping left on Boise Cascade for now. Here are three reasons we avoid BCC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Boise Cascade’s sales grew at a sluggish 3.2% 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
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, Boise Cascade’s margin dropped by 6.9 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Boise Cascade’s free cash flow margin for the trailing 12 months was breakeven.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Unfortunately, Boise Cascade’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
We see the value of companies helping their customers, but in the case of Boise Cascade, we’re out. With its shares outperforming the market lately, the stock trades at 21.8× forward P/E (or $84.00 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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