Simpson trades at $186.77 and has moved in lockstep with the market. Its shares have returned 10.6% over the last six months while the S&P 500 has gained 13%.
Is now the time to buy Simpson, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.We're sitting this one out for now. Here are three reasons why there are better opportunities than SSD and a stock we'd rather own.
Why Is Simpson Not Exciting?
Aiming to build safer and stronger buildings, Simpson (NYSE:SSD) designs and manufactures structural connectors, anchors, and other construction products.
1. 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 Simpson, its EPS declined by 1.2% annually over the last two years while its revenue grew by 3.8%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Free Cash Flow Margin Dropping
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.
As you can see below, Simpson’s margin dropped by 8 percentage points over the last five years. Simpson’s five-year free cash flow profile was compelling, but shareholders are surely hoping for its trend to reverse. Continued declines could signal that the business is becoming more capital-intensive. Its free cash flow margin for the trailing 12 months was 4.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, Simpson’s ROIC has 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
Simpson isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 21.2x forward price-to-earnings (or $186.77 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at CrowdStrike, the most entrenched endpoint security platform.
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