AAON’s stock price has taken a beating over the past six months, shedding 24.7% of its value and falling to $78.88 per share. This may have investors wondering how to approach the situation.
Following the pullback, is now a good time to buy AAON? Find out in our full research report, it’s free.
Why Does AAON Stock Spark Debate?
Backed by two million square feet of lab testing space, AAON (NASDAQ: AAON) makes heating, ventilation, and air conditioning equipment for different types of buildings.
Two Positive Attributes:
1. Surging Backlog Locks In Future Sales
Investors interested in HVAC and Water Systems companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AAON’s future revenue streams.
AAON’s backlog punched in at $1.97 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 93.5%. This performance was fantastic and shows the company has a robust sales pipeline because it is accumulating more orders than it can fulfill. Its growth also suggests that customers are committing to AAON for the long term, enhancing the business’s predictability. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect AAON’s revenue to rise by 26.5%, close to its 30.5% annualized growth for the past five years. This projection is eye-popping and suggests the market is baking in success for its products and services.
One Reason to Be Careful:
Cash Burn Ignites Concerns
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.
AAON’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.2%, meaning it lit $3.24 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments in working capital/capital expenditures are the primary culprit.
Final Judgment
AAON’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 29.2× forward P/E (or $78.88 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.
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