What a time it’s been for Redwire. In the past six months alone, the company’s stock price has increased by a massive 132%, reaching $16.23 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Redwire, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.We’re glad investors have benefited from the price increase, but we're cautious about Redwire. Here are three reasons why you should be careful with RDW and a stock we'd rather own.
Why Is Redwire Not Exciting?
Based in Jacksonville, Florida, Redwire (NYSE:RDW) is a provider of systems and components used in space infrastructure.
1. EPS Trending Down
Analyzing the 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.
Redwire’s earnings losses deepened over the last one years as its EPS dropped 13.6% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Redwire’s low margin of safety could leave its stock price susceptible to large downswings.
2. 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.
Redwire’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 15.1%, meaning it lit $15.11 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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.
Redwire burned through $13.29 million of cash over the last year, and its $123.3 million of debt exceeds the $43.09 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Redwire’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Redwire until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Redwire isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 55.2× forward EV-to-EBITDA (or $16.23 per share). This valuation tells us a lot of optimism is priced in - we think there are better investment opportunities out there. We’d recommend looking at CrowdStrike, the most entrenched endpoint security platform.
Stocks We Would Buy Instead of Redwire
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market to cap off the year - and we’re zeroing in on the stocks that could benefit immensely.
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.
