Shareholders of Latham would probably like to forget the past six months even happened. The stock dropped 22.5% and now trades at $5.34. This might have investors contemplating their next move.
Is there a buying opportunity in Latham, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Latham Will Underperform?
Even with the cheaper entry price, we’re cautious about Latham. Here are three reasons we avoid SWIM, plus one 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 put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Latham grew its sales at a weak 2% compounded annual growth rate. This was below our standards.
2. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Latham’s operating margin has been trending up over the last 12 months and averaged 4.2% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports inadequate profitability for a consumer discretionary business.
3. Projected Free Cash Flow Gains to Pump Profits
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.
Over the next year, analysts predict Latham’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 3.3% for the last 12 months will increase to 5.6%, giving it options for capital deployment (investments, share buybacks, etc.).
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Latham, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 25.1× forward P/E (or $5.34 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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