Shareholders of Luxfer would probably like to forget the past six months even happened. The stock dropped 24.5% and now trades at $11.18. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Luxfer, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Luxfer Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why LXFR 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Luxfer’s sales grew at a tepid 5.6% compounded annual growth rate over the last four years. This fell short of our benchmark for the industrials sector. 
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, Luxfer’s margin dropped by 8.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Luxfer’s free cash flow margin for the trailing 12 months was 10.7%.
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, Luxfer’s ROIC has decreased 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 Luxfer, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 10.6× forward P/E (or $11.18 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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