What a time it’s been for TTM Technologies. In the past six months alone, the company’s stock price has increased by a massive 48.8%, setting a new 52-week high of $37.15 per share. 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 TTM Technologies, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think TTM Technologies Will Underperform?
We’re happy investors have made money, but we're swiping left on TTM Technologies for now. Here are three reasons why you should be careful with TTMI 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. Regrettably, TTM Technologies’s sales grew at a tepid 3.8% compounded annual growth rate over the last five years. This was below our standard for the business services sector. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, TTM Technologies’s margin dropped by 9.2 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. TTM Technologies’s free cash flow margin for the trailing 12 months was breakeven.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
TTM Technologies historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.7%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
TTM Technologies doesn’t pass our quality test. Following the recent surge, the stock trades at 17.5× forward P/E (or $37.15 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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