OPENLANE’s 28.3% return over the past six months has outpaced the S&P 500 by 19%, and its stock price has climbed to $38.46 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in OPENLANE, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is OPENLANE Not Exciting?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons you should be careful with OPLN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, OPENLANE struggled to consistently increase demand as its $2.00 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a lower quality business.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
OPENLANE historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
3. High Debt Levels Increase Risk
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.
OPENLANE’s $2.30 billion of debt exceeds the $180.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $346.5 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. OPENLANE could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope OPENLANE can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
OPENLANE isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 26.7× forward P/E (or $38.46 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the most dominant software business in the world.
Stocks We Like More Than OPENLANE
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