Over the last six months, Enviri’s shares have sunk to $7.63, producing a disappointing 10.8% loss - a stark contrast to the S&P 500’s 9.3% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Enviri, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.Even with the cheaper entry price, we don't have much confidence in Enviri. Here are three reasons why you should be careful with NVRI and a stock we'd rather own.
Why Is Enviri Not Exciting?
Cooling America’s first indoor ice rink in the 19th century, Enviri (NYSE:NVRI) offers steel and waste handling services.
1. EPS Trending Down
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.
Sadly for Enviri, its EPS declined by 17.2% annually over the last five years while its revenue grew by 10%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Cash Burn Ignites Concerns
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.
Enviri’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.2%, meaning it lit $3.23 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Enviri burned through $37.44 million of cash over the last year, and its $1.56 billion of debt exceeds the $110.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Enviri’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Enviri until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Enviri isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 40.9× forward price-to-earnings (or $7.63 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at Costco, one of Charlie Munger’s all-time favorite businesses.
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