Perma-Fix has been on fire lately. In the past six months alone, the company’s stock price has rocketed 49.7%, reaching $10.24 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Perma-Fix, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Perma-Fix Will Underperform?
Despite the momentum, we're swiping left on Perma-Fix for now. Here are three reasons why PESI doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Perma-Fix’s demand was weak and its revenue declined by 8.1% per year. This wasn’t a great result and is a sign of poor business quality.
2. Free Cash Flow Margin Dropping
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.
As you can see below, Perma-Fix’s margin dropped by 31.6 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. Perma-Fix’s free cash flow margin for the trailing 12 months was negative 27.4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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, Perma-Fix’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Perma-Fix falls short of our quality standards. After the recent surge, the stock trades at 167.2× forward P/E (or $10.24 per share). This multiple tells us a lot of good news 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 Perma-Fix
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