AAON trades at $90.05 per share and has stayed right on track with the overall market, gaining 9.8% over the last six months. At the same time, the S&P 500 has returned 9.6%.
Is now the time to buy AAON, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is AAON Not Exciting?
We're sitting this one out for now. Here are three reasons we avoid AAON and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, AAON’s operating margin decreased by 6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 10.1%.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
AAON’s EPS grew at an unimpressive 5.3% compounded annual growth rate over the last five years, lower than its 20.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. 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, AAON’s margin dropped by 27.2 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. AAON’s free cash flow margin for the trailing 12 months was negative 18.4%.
Final Judgment
AAON isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 46.8× forward P/E (or $90.05 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
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