What a time it’s been for Matson. In the past six months alone, the company’s stock price has increased by a massive 75.8%, reaching $172.26 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 Matson, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Matson Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Matson. Here are three reasons we avoid MATX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Matson grew its sales at a mediocre 7% compounded annual growth rate. This was below our standard for the industrials sector.
2. Free Cash Flow Margin Dropping
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.
As you can see below, Matson’s margin dropped by 12.9 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Matson’s free cash flow margin for the trailing 12 months was 3.9%.
3. New Investments Fail to Bear Fruit as ROIC Declines
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. Unfortunately, Matson’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Matson isn’t a terrible business, but it doesn’t pass our quality test. Following the recent rally, the stock trades at 13× forward P/E (or $172.26 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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