Over the last six months, Kadant’s shares have sunk to $291.14, producing a disappointing 6.3% loss - a stark contrast to the S&P 500’s 13.9% gain. This might have investors contemplating their next move.
Is now the time to buy Kadant, 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 for active Edge members.
Why Is Kadant Not Exciting?
Even though the stock has become cheaper, we're swiping left on Kadant for now. Here are three reasons you should be careful with KAI and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Kadant’s recent performance shows its demand has slowed as its annualized revenue growth of 3.8% over the last two years was below its five-year trend. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Kadant, its EPS declined by 3.6% annually over the last two years while its revenue grew by 3.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Kadant’s margin dropped by 3.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Kadant’s free cash flow margin for the trailing 12 months was 14.2%.
Final Judgment
Kadant isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 29.1× forward P/E (or $291.14 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Kadant
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