Since October 2020, the S&P 500 has delivered a total return of 100%. But one standout stock has more than doubled the market - over the past five years, Somnigroup has surged 264% to $83.22 per share. Its momentum hasn’t stopped as it’s also gained 33.2% in the last six months, beating the S&P by 14.8%.
Is there a buying opportunity in Somnigroup, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Somnigroup Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Somnigroup. Here are three reasons why SGI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Somnigroup grew its sales at a 13.5% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Somnigroup has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.6%, subpar for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Somnigroup’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
Somnigroup isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 29.8× forward P/E (or $83.22 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 safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Somnigroup
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