Over the past six months, Columbus McKinnon’s shares (currently trading at $14.54) have posted a disappointing 17.3% loss, well below the S&P 500’s 8.5% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Columbus McKinnon, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Columbus McKinnon Will Underperform?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons why there are better opportunities than CMCO, plus one stock we’d rather own.
1. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Columbus McKinnon, its EPS declined by 16.9% annually over the last two years while its revenue grew by 8.5%. This tells us the company became less profitable on a per-share basis as it expanded.
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, Columbus McKinnon’s margin dropped by 17.7 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. Columbus McKinnon’s free cash flow margin for the trailing 12 months was negative 13.7%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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.
Columbus McKinnon burned through $164.1 million of cash over the last year, and its $2.42 billion of debt exceeds the $107.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Columbus McKinnon’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Columbus McKinnon until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Columbus McKinnon falls short of our quality standards. Following the recent decline, the stock trades at 8.3× forward P/E (or $14.54 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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