Over the past six months, Hillman’s stock price fell to $8.33. Shareholders have lost 17.9% of their capital, which is disappointing considering the S&P 500 has climbed by 5.1%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Hillman, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Hillman Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why HLMN doesn't excite us 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 have short-term success, but a top-tier one grows for years. Unfortunately, Hillman’s 2.6% annualized revenue growth over the last five years was sluggish. This was below our standards.
2. Mediocre Free Cash Flow Margin 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.
Hillman has shown poor cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.6%, below what we’d expect for an industrials business.
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).
Hillman historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.5%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
Hillman’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 13.8× forward P/E (or $8.33 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
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