Shareholders of Concentrix would probably like to forget the past six months even happened. The stock dropped 22.8% and now trades at $24.55. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Concentrix, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Concentrix Not Exciting?
Despite the more favorable entry price, we’re passing on Concentrix for now. Here are three reasons we avoid CNXC, plus one stock we’d rather own.
1. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Concentrix’s EPS grew at an unimpressive 4% compounded annual growth rate over the last five years, lower than its 14% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. 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).
Concentrix 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 business services companies.
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, Concentrix’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Concentrix isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 2.1× forward P/E (or $24.55 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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