Enviri has been on fire lately. In the past six months alone, the company’s stock price has rocketed 92%, reaching $18.26 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Enviri, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Enviri Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Enviri for now. Here are three reasons why NVRI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Enviri’s sales grew at a tepid 5% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.
2. Cash Burn Ignites Concerns
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.
While Enviri’s free cash flow broke even this quarter, the broader story hasn’t been so clean. Enviri’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.1%, meaning it lit $2.08 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Enviri’s $1.64 billion of debt exceeds the $131 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $276.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Enviri could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Enviri can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Enviri, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 10.5× forward EV-to-EBITDA (or $18.26 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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