Quanex has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 11.6% to $22.91 per share while the index has gained 8.6%.

Is now the time to buy Quanex, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Quanex Not Exciting?

We don't have much confidence in Quanex. Here are three reasons there are better opportunities than NX and a 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 Quanex, its EPS declined by 5.4% annually over the last two years while its revenue grew by 18%. This tells us the company became less profitable on a per-share basis as it expanded.

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, Quanex’s margin dropped by 9.9 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 becoming a more capital-intensive business. Quanex’s free cash flow margin for the trailing 12 months was 1.3%.

3. 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, Quanex’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

Quanex isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 8.3× forward P/E (or $22.91 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.

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