What a time it’s been for Park-Ohio. In the past six months alone, the company’s stock price has increased by a massive 40.4%, reaching $27.34 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Park-Ohio, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Park-Ohio Will Underperform?
We’re happy investors have made money, but we're swiping left on Park-Ohio for now. Here are three reasons you should be careful with PKOH and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Park-Ohio’s 3.9% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Park-Ohio has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 15.5% gross margin over the last five years. That means Park-Ohio paid its suppliers a lot of money ($84.50 for every $100 in revenue) to run its business. 
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While Park-Ohio posted positive free cash flow this quarter, the broader story hasn’t been so clean. Park-Ohio’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.3%, meaning it lit $1.26 of cash on fire for every $100 in revenue.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Park-Ohio, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 8.8× forward P/E (or $27.34 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.
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