Over the past six months, Insteel’s stock price fell to $31.10. Shareholders have lost 13.8% of their capital, which is disappointing considering the S&P 500 has climbed by 8.9%. This may have investors wondering how to approach the situation.
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Why Is Insteel Not Exciting?
Even with the cheaper entry price, we don’t have much confidence in Insteel. Here are three reasons you should be careful with IIIN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Insteel’s 4.9% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Insteel, its EPS declined by 6.6% annually over the last five years while its revenue grew by 4.9%. This tells us the company became less profitable on a per-share basis as it expanded.
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).
Over the last few years, Insteel’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Insteel isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 14.6× forward P/E (or $31.10 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Insteel
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