American Outdoor Brands has had an impressive run over the past six months as its shares have beaten the S&P 500 by 28.7%. The stock now trades at $9.80, marking a 38.4% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy American Outdoor Brands, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think American Outdoor Brands Will Underperform?
Despite the momentum, we don't have much confidence in American Outdoor Brands. Here are three reasons there are better opportunities than AOUT and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. American Outdoor Brands’s demand was weak over the last five years as its sales fell at a 4.3% annual rate. This was below our standards and signals it’s a low quality business.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
American Outdoor Brands has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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, American Outdoor Brands’s ROIC averaged 1.2 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
American Outdoor Brands doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 36.9× forward P/E (or $9.80 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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