Over the past six months, Matthews’s stock price fell to $21.11. Shareholders have lost 19.3% of their capital, which is disappointing considering the S&P 500 has climbed by 11.7%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Matthews Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Matthews. Here are three reasons we avoid MATW, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Matthews struggled to consistently generate demand over the last five years as its sales dropped at a 7.4% annual rate. This was below our standards and is a sign of poor business quality.
2. Cash Burn Ignites Concerns
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.
Over the last two years, Matthews’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.3%, meaning it lit $4.33 of cash on fire for every $100 in revenue.
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).
Over the last few years, Matthews’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Matthews, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 26.5× forward P/E (or $21.11 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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