The past six months have been a windfall for Enviri’s shareholders. The company’s stock price has jumped 92.5%, hitting $12.24 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Enviri, 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 Do We Think Enviri Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Enviri. Here are three reasons we avoid NVRI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Enviri’s sales grew at a mediocre 6.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
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.
Enviri’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 2.2%, meaning it lit $2.19 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.
Enviri burned through $70.48 million of cash over the last year, and its $1.62 billion of debt exceeds the $114.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Enviri’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 Enviri until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Enviri doesn’t pass our quality test. Following the recent surge, the stock trades at 3.2× forward EV-to-EBITDA (or $12.24 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
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