Luxfer trades at $13.90 per share and has stayed right on track with the overall market, gaining 18.5% over the last six months. At the same time, the S&P 500 has returned 18.8%.
Is there a buying opportunity in Luxfer, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Luxfer Will Underperform?
We don't have much confidence in Luxfer. Here are three reasons there are better opportunities than LXFR 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. Regrettably, Luxfer’s sales grew at a sluggish 2% compounded annual growth rate over the last five years. This was below our standards.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Luxfer’s margin dropped by 7.8 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Luxfer’s free cash flow margin for the trailing 12 months was 8.9%.
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. Over the last few years, Luxfer’s ROIC has unfortunately decreased. 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 Luxfer, we’ll be cheering from the sidelines. That said, the stock currently trades at 12.6× forward P/E (or $13.90 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
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