Novanta has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 10.3% to $136.84 per share while the index has gained 10.2%.

Is now the time to buy Novanta, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Novanta Not Exciting?

We don't have much confidence in Novanta. Here are three reasons you should be careful with NOVT and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Novanta’s recent performance shows its demand has slowed as its annualized revenue growth of 4% over the last two years was below its five-year trend.

2. EPS Growth Has Stalled Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Novanta’s flat EPS over the last two years was worse than its 4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

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.

As you can see below, Novanta’s margin dropped by 3.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Novanta’s free cash flow margin for the trailing 12 months was 10.7%.

Final Judgment

Novanta isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 38.1× forward P/E (or $136.84 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward the most dominant software business in the world.

Stocks We Like More Than Novanta

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