NN’s 35% return over the past six months has outpaced the S&P 500 by 31%, and its stock price has climbed to $2.57 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in NN, 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 Do We Think NN Will Underperform?
We’re happy investors have made money, but we're cautious about NN. Here are three reasons you should be careful with NNBR and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, NN struggled to consistently increase demand as its $422.2 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a low quality business.
2. Cash Burn Ignites Concerns
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.
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 1.1%, meaning it lit $1.10 of cash on fire for every $100 in revenue.
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, 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
We cheer for all companies making their customers lives easier, but in the case of NN, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 48.2× forward P/E (or $2.57 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of NN
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