UL Solutions’s 18.3% return over the past six months has outpaced the S&P 500 by 13.2%, and its stock price has climbed to $90.42 per share. This run-up might have investors contemplating their next move.
Is now the time to buy UL Solutions, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is UL Solutions Not Exciting?
We’re happy investors have made money, but we're swiping left on UL Solutions for now. Here are three reasons there are better opportunities than ULS and a stock we'd rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, UL Solutions’s adjusted operating margin decreased by 4.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 19.5%.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
UL Solutions’s full-year EPS grew at a weak 2.4% compounded annual growth rate over the last three years, worse than the broader business services sector.
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, UL Solutions’s ROIC averaged 2.7 percentage point decreases each year 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
UL Solutions isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 40.6× forward P/E (or $90.42 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of UL Solutions
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