What a fantastic six months it’s been for ArcBest. Shares of the company have skyrocketed 89.1%, hitting $145.50. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Do We Think ArcBest Will Underperform?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons why ARCB doesn’t excite us, plus one stock we’d rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Ground Transportation company because there’s a ceiling to what customers will pay.
ArcBest’s units sold came in at 19,840 in the latest quarter, and over the last two years, averaged 2.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for ArcBest, its EPS declined by 2% annually over the last five years while its revenue grew by 5.7%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, ArcBest’s ROIC has decreased significantly 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
We cheer for all companies making their customers lives easier, but in the case of ArcBest, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 22.4× forward P/E (or $145.50 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of ArcBest
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