Flex currently trades at $65 and has been a dream stock for shareholders. It’s returned 263% since March 2021, more than tripling the S&P 500’s 79.9% gain. The company has also beaten the index over the past six months as its stock price is up 21.1% thanks to its solid quarterly results.
Is now the time to buy Flex, 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 Flex Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Flex. Here are three reasons you should be careful with FLEX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Flex’s sales grew at a sluggish 2.8% compounded annual growth rate over the last five years. This was below our standards.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Flex has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.8%, subpar for a business services business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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. Unfortunately, Flex’s ROIC averaged 4.3 percentage point decreases each year over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Flex isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 17.9× forward P/E (or $65 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Flex
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