Shareholders of L.B. Foster would probably like to forget the past six months even happened. The stock dropped 22.5% and now trades at $21.14. This may have investors wondering how to approach the situation.
Is there a buying opportunity in L.B. Foster, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think L.B. Foster Will Underperform?
Even with the cheaper entry price, we're cautious about L.B. Foster. Here are three reasons why we avoid FSTR and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. L.B. Foster struggled to consistently generate demand over the last five years as its sales dropped at a 2.3% annual rate. This was below our standards and is a sign of poor business quality. 
2. Breakeven Free Cash Flow Limits Reinvestment Potential
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.
L.B. Foster broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
L.B. Foster historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.7%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of L.B. Foster, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 5× forward EV-to-EBITDA (or $21.14 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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