The past six months have been a windfall for Custom Truck One Source’s shareholders. The company’s stock price has jumped 54.1%, hitting $9.79 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Custom Truck One Source, 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 Custom Truck One Source Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Custom Truck One Source. Here are three reasons you should be careful with CTOS, plus one 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. Custom Truck One Source’s recent performance shows its demand has slowed as its annualized revenue growth of 4.3% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. EPS Took a Dip Over the Last Two Years
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.
Sadly for Custom Truck One Source, its EPS declined by 45.4% annually over the last two years while its revenue grew by 4.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Cash Burn Ignites Concerns
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.
Custom Truck One Source’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 13.9%, meaning it lit $13.88 of cash on fire for every $100 in revenue.
Final Judgment
Custom Truck One Source isn’t a terrible business, but it isn’t one of our picks. After the recent surge, the stock trades at 58.7× forward P/E (or $9.79 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident 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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