Array’s 18.3% return over the past six months has outpaced the S&P 500 by 7.4%, and its stock price has climbed to $9.22 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Array, 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.
Why Do We Think Array Will Underperform?
We’re happy investors have made money, but we’re cautious about Array. Here are three reasons you should be careful with ARRY, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Array’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.6% over the last two years. 
2. 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. Unfortunately, Array’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Array’s $666.4 million of debt exceeds the $202 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $86.16 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. Array 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 Array can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Array falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 11.9× forward P/E (or $9.22 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
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