Over the past six months, OPENLANE has been a great trade, beating the S&P 500 by 11.7%. Its stock price has climbed to $30.77, representing a healthy 16.8% increase. This run-up might have investors contemplating their next move.
Is now the time to buy OPENLANE, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is OPENLANE Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on OPENLANE for now. Here are three reasons there are better opportunities than OPLN and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, OPENLANE’s demand was weak and its revenue declined by 2.4% per year. This wasn’t a great result and signals it’s a lower quality business.
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, OPENLANE’s margin dropped by 6.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. OPENLANE’s free cash flow margin for the trailing 12 months was 17.5%.
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.
OPENLANE’s $2.35 billion of debt exceeds the $141.5 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $332.6 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. OPENLANE 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 OPENLANE can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
OPENLANE isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 23.2× forward P/E (or $30.77 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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