What a fantastic six months it’s been for Advanced Energy. Shares of the company have skyrocketed 46.1%, hitting $154.13. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Advanced Energy, 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 Advanced Energy Will Underperform?
Despite the momentum, we don't have much confidence in Advanced Energy. Here are three reasons why AEIS doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Advanced Energy’s 7% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Advanced Energy’s unimpressive 7.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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, Advanced Energy’s ROIC has decreased significantly 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
We cheer for all companies making their customers lives easier, but in the case of Advanced Energy, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 27.5× forward P/E (or $154.13 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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