Connection has had an impressive run over the past six months as its shares have beaten the S&P 500 by 13.1%. The stock now trades at $73.17, marking a 20.6% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Connection, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Connection Not Exciting?
Despite the momentum, we’re sitting this one out for now. Here are three reasons why there are better opportunities than CNXN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Connection grew its sales at a sluggish 2.8% compounded annual growth rate. This fell short of our benchmarks.
2. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Connection’s EPS grew at an unimpressive 6.9% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 2.5% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Connection has shown weak 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 3.4%, below what we’d expect for a business services business.
Final Judgment
Connection’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 18.6× forward P/E (or $73.17 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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