Over the past six months, HNI’s stock price fell to $39.02. Shareholders have lost 13% of their capital, which is disappointing considering the S&P 500 has climbed by 7.2%. This might have investors contemplating their next move.
Is now the time to buy HNI, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is HNI Not Exciting?
Even though the stock has become cheaper, we’re swiping left on HNI for now. Here are three reasons you should be careful with HNI, plus one stock we’d rather own.
1. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
HNI’s EPS grew at an unimpressive 9.3% compounded annual growth rate over the last two years, lower than its 18.8% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
HNI has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.6%, below what we’d expect for a business services business.
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.
HNI’s $1.83 billion of debt exceeds the $78.2 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $290.9 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. HNI 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 HNI can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
HNI isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 8.8× forward P/E (or $39.02 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than HNI
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