Over the last six months, CACI’s shares have sunk to $524.23, producing a disappointing 12.1% loss - a stark contrast to the S&P 500’s 7.5% gain. This might have investors contemplating their next move.
Is now the time to buy CACI, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is CACI Not Exciting?
Despite the more favorable entry price, we don’t have much confidence in CACI. Here are three reasons why CACI doesn’t excite us, plus one stock we’d rather own.
1. 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, CACI’s margin dropped by 3.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. CACI’s free cash flow margin for the trailing 12 months was 6.3%.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
CACI historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.8%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
3. New Investments Aren’t Moving the Needle
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, CACI’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
CACI isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 17.5× forward P/E (or $524.23 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 investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Like More Than CACI
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