What a time it’s been for Plexus. In the past six months alone, the company’s stock price has increased by a massive 52%, setting a new 52-week high of $214.23 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Plexus, 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 Plexus Not Exciting?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons we avoid PLXS and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Plexus grew its sales at a mediocre 4.1% compounded annual growth rate. This fell short of our benchmark for the business services sector.
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.
Plexus has shown poor 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 2.4%, below what we’d expect for a business services business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Plexus’s ROIC averaged 2.8 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Plexus isn’t a terrible business, but it doesn’t pass our quality test. Following the recent surge, the stock trades at 25.5× forward P/E (or $214.23 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Plexus
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