Latham has been on fire lately. In the past six months alone, the company’s stock price has rocketed 41.1%, reaching $7.42 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Latham, 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 for active Edge members.
Why Is Latham Not Exciting?
Despite the momentum, we're cautious about Latham. Here are three reasons why SWIM doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Latham grew its sales at a 11.6% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Flow Margin Set to Decline
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.
Over the next year, analysts predict Latham’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 2.3% for the last 12 months will decrease to 1.9%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Latham historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
Latham isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 53× forward P/E (or $7.42 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
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