LSI’s stock price has taken a beating over the past six months, shedding 21% of its value and falling to $15.99 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy LSI, 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.
Why Is LSI Not Exciting?
Even though the stock has become cheaper, we're swiping left on LSI for now. Here are three reasons why LYTS doesn't excite us and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. LSI’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.5% over the last two years was well below its five-year trend. We also note many other Electrical Systems businesses have faced declining sales because of cyclical headwinds. While LSI grew slower than we’d like, it did do better than its peers. 
2. Recent EPS Growth Below Our Standards
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.
LSI’s EPS grew at a weak 2.7% compounded annual growth rate over the last two years, lower than its 4.5% annualized revenue growth. 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, LSI’s margin dropped by 5.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. LSI’s free cash flow margin for the trailing 12 months was 6.4%.
Final Judgment
LSI isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 13.3× forward P/E (or $15.99 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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