Over the past six months, Boise Cascade’s shares (currently trading at $77.63) have posted a disappointing 15.5% loss, well below the S&P 500’s 32.7% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Boise Cascade Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why BCC doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Boise Cascade grew its sales at a mediocre 6.5% compounded annual growth rate. This was below our standard for the industrials sector.
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, Boise Cascade’s margin dropped by 5.5 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. Boise Cascade’s free cash flow margin for the trailing 12 months was breakeven.
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, Boise Cascade’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 see the value of companies helping their customers, but in the case of Boise Cascade, we’re out. Following the recent decline, the stock trades at 11.5× forward P/E (or $77.63 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. We’d recommend looking at one of our top digital advertising picks.
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