Over the past six months, Atkore’s shares (currently trading at $58.52) have posted a disappointing 10.7% loss, well below the S&P 500’s 15.7% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Atkore Will Underperform?
Even though the stock has become cheaper, we're cautious about Atkore. Here are three reasons there are better opportunities than ATKR and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
In addition to reported revenue, organic revenue is a useful data point for analyzing Electrical Systems companies. This metric gives visibility into Atkore’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Atkore’s organic revenue averaged 11.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Atkore might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Free Cash Flow Margin Dropping
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.
As you can see below, Atkore’s margin dropped by 5.8 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Atkore’s free cash flow margin for the trailing 12 months was 9.1%.
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, Atkore’s ROIC has decreased significantly 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 Atkore, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 9.5× forward P/E (or $58.52 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.
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