What a time it’s been for NN. In the past six months alone, the company’s stock price has increased by a massive 190%, setting a new 52-week high of $3.54 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy NN, 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 NN Will Underperform?
Despite the momentum, we don’t have much confidence in NN. Here are three reasons why NNBR doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
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. Unfortunately, NN struggled to consistently increase demand as its $435 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
2. 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.
NN’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 1.7%, meaning it lit $1.75 of cash on fire for every $100 in revenue.
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).
Unfortunately, NN’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
NN falls short of our quality standards. Following the recent rally, the stock trades at 29.1× forward P/E (or $3.54 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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