Custom Truck One Source’s 25.6% return over the past six months has outpaced the S&P 500 by 20.9%, and its stock price has climbed to $6.03 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Custom Truck One Source, 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 Custom Truck One Source Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons why we avoid CTOS and a stock we'd rather own.

1. Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Custom Truck One Source’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.1% over the last two years was well below its five-year trend.

2. 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 Custom Truck One Source, its EPS declined by 52% annually over the last two years while its revenue grew by 4.1%. This tells us the company became less profitable on a per-share basis as it expanded.

3. 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, Custom Truck One Source’s margin dropped by 24.4 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. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Custom Truck One Source’s free cash flow margin for the trailing 12 months was negative 9.4%.

Final Judgment

Custom Truck One Source isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 62.4× forward P/E (or $6.03 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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