Heartland Express has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.3% to $9.96 per share while the index has gained 11.5%.
Is there a buying opportunity in Heartland Express, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Heartland Express Will Underperform?
We don't have much confidence in Heartland Express. Here are three reasons you should be careful with HTLD 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 put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Heartland Express grew its sales at a tepid 5.8% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. 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, Heartland Express’s margin dropped by 19.5 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Heartland Express’s free cash flow margin for the trailing 12 months was 4.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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. Over the last few years, Heartland Express’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping their customers, but in the case of Heartland Express, we’re out. That said, the stock currently trades at $9.96 per share (or a forward price-to-sales ratio of 1×). The market typically values companies like Heartland Express based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at our favorite semiconductor picks and shovels play.
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