Over the last six months, NV5 Global’s shares have sunk to $18.92, producing a disappointing 18.9% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in NV5 Global, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Even though the stock has become cheaper, we're swiping left on NV5 Global for now. Here are three reasons why NVEE doesn't excite us and a stock we'd rather own.
Why Is NV5 Global Not Exciting?
Operating from over 100 locations across the U.S. and internationally, NV5 Global (NASDAQ:NVEE) provides engineering, environmental, geospatial, and technical consulting services to public and private sector clients for infrastructure and building projects.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, NV5 Global’s adjusted operating margin decreased by 5.1 percentage points over the last four years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. NV5 Global’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was 4.6%.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for NV5 Global, its EPS declined by 4.9% annually over the last two years while its revenue grew by 9.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. 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, NV5 Global’s margin dropped by 8.3 percentage points over the last four years. If its declines continue, it could signal increasing investment needs and capital intensity. NV5 Global’s free cash flow margin for the trailing 12 months was 4.3%.
Final Judgment
NV5 Global’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 15.7× forward price-to-earnings (or $18.92 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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