Over the last six months, AAON’s shares have sunk to $93.86, producing a disappointing 10% loss - a stark contrast to the S&P 500’s 3.1% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in AAON, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is AAON Not Exciting?
Even with the cheaper entry price, we're cautious about AAON. Here are three reasons you should be careful with AAON and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, AAON’s operating margin decreased by 3.7 percentage points over the last five 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. Its operating margin for the trailing 12 months was 10.2%.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
AAON’s EPS grew at an unimpressive 6.5% compounded annual growth rate over the last five years, lower than its 22.9% 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, AAON’s margin dropped by 14.3 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. AAON’s free cash flow margin for the trailing 12 months was negative 13.2%.
Final Judgment
AAON isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 46.9× forward P/E (or $93.86 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the most dominant software business in the world.
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