Viking has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6%. The stock now trades at $90.07, marking a 10.2% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why do we think Viking will underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons why VIK doesn’t excite us, plus one stock we’d rather own.
1. Lackluster revenue growth
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or trend. 
2. Weak operating margin could cause trouble
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Viking’s operating margin has been trending up over the last 12 months and averaged 22.5% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports lousy profitability for a consumer discretionary business.
3. Free cash flow projections disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates, according to S&P, show they’re expecting Viking’s free cash flow margin of 16.6% for the last 12 months to remain the same.
Final judgment
Viking falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 23.9× forward P/E (or $90.07 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks we like more than Viking
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