LSI has been on fire lately. In the past six months alone, the company’s stock price has rocketed 49.2%, reaching $23.29 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in LSI, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is LSI Not Exciting?
We’re happy investors have made money, but we don't have much confidence in LSI. Here are three reasons we avoid LYTS and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. LSI’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 7.4% over the last two years was well below its five-year trend. We also note many other Electrical Systems businesses have faced declining sales because of cyclical headwinds. While LSI grew slower than we’d like, it did do better than its peers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect LSI’s revenue to rise by 3.5%, a deceleration versus its 13.4% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
LSI’s EPS grew at a weak 3% compounded annual growth rate over the last two years, lower than its 7.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
LSI isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 20.2× forward P/E (or $23.29 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of LSI
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