Shareholders of Tecnoglass would probably like to forget the past six months even happened. The stock dropped 24.7% and now trades at $44.27. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Tecnoglass, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Tecnoglass Not Exciting?
Even with the cheaper entry price, we're cautious about Tecnoglass. Here are three reasons why TGLS doesn't excite us and a stock we'd rather own.
1. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Tecnoglass, its EPS declined by 5.2% annually over the last two years while its revenue grew by 8.6%. This tells us the company became less profitable on a per-share basis as it expanded.
2. 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, Tecnoglass’s margin dropped by 9.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Tecnoglass’s free cash flow margin for the trailing 12 months was 3.5%.
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 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. Over the last few years, Tecnoglass’s ROIC has unfortunately 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
Tecnoglass isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 15.9× forward P/E (or $44.27 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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