Perma-Fix currently trades at $12.19 per share and has shown little upside over the past six months, posting a small loss of 3.1%. The stock also fell short of the S&P 500’s 5.1% gain during that period.
Is now the time to buy Perma-Fix, 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 Perma-Fix Will Underperform?
We're cautious about Perma-Fix. Here are three reasons you should be careful with PESI and a stock we'd rather own.
1. Revenue Spiraling Downwards
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. Perma-Fix struggled to consistently generate demand over the last five years as its sales dropped at a 10.2% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. 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, Perma-Fix’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Perma-Fix burned through $15.46 million of cash over the last year. With $24.98 million of cash on its balance sheet, the company has around 19 months of runway left (assuming its $2.04 million of debt isn’t due right away).
Unless the Perma-Fix’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Perma-Fix until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Perma-Fix, we’ll be cheering from the sidelines. With its shares underperforming the market lately, the stock trades at $12.19 per share (or a forward price-to-sales ratio of 2.8×). The market typically values companies like Perma-Fix based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at one of our top software and edge computing picks.
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