Shareholders of Universal Logistics would probably like to forget the past six months even happened. The stock dropped 39.4% and now trades at $15.39. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Universal Logistics Will Underperform?
Despite the more favorable entry price, we're swiping left on Universal Logistics for now. Here are three reasons we avoid ULH and a 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 have short-term success, but a top-tier one grows for years. Over the last five years, Universal Logistics grew its sales at a sluggish 3.5% compounded annual growth rate. This was below our standard for the industrials sector.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
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.
Universal Logistics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
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. Unfortunately, Universal Logistics’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Universal Logistics, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 23.7× forward P/E (or $15.39 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Universal Logistics
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