Shareholders of Universal Logistics would probably like to forget the past six months even happened. The stock dropped 27.9% and now trades at $17.67. This might have investors contemplating their next move.

Is now the time to buy Universal Logistics, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Universal Logistics Will Underperform?

Despite the more favorable entry price, we're cautious about Universal Logistics. Here are three reasons you should be careful with ULH and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Universal Logistics’s 2.3% annualized revenue growth over the last five years was sluggish. This was below our standards.

2. 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, Universal Logistics’s ROIC has decreased 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.

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.

Universal Logistics burned through $41.13 million of cash over the last year, and its $712.1 million of debt exceeds the $37.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Universal Logistics’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 Universal Logistics until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping their customers, but in the case of Universal Logistics, we’re out. After the recent drawdown, the stock trades at 16.6× forward P/E (or $17.67 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.

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