Over the past six months, NV5 Global has been a great trade, beating the S&P 500 by 23.4%. Its stock price has climbed to $23.90, representing a healthy 29% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy NV5 Global, 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 Is NV5 Global Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on NV5 Global for now. Here are three reasons why NVEE doesn't excite us and a stock we'd rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, NV5 Global’s adjusted operating margin decreased by 5.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. NV5 Global’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was 4.5%.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for NV5 Global, its EPS declined by 2.8% annually over the last two years while its revenue grew by 11%. This tells us the company became less profitable on a per-share basis as it expanded.
3. 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, NV5 Global’s margin dropped by 13.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. NV5 Global’s free cash flow margin for the trailing 12 months was 5.4%.
Final Judgment
NV5 Global isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 17.3× forward P/E (or $23.90 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
Stocks We Would Buy Instead of NV5 Global
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