Buy, Sell, or Hold Post Q2 Earnings?
Verra Mobility’s stock price has taken a beating over the past six months, shedding 75.4% of its value and falling to $4.65 per share. This might have investors contemplating their next move.
Is now the time to buy Verra Mobility, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Verra Mobility Not Exciting?
Despite the more favorable entry price, we’re cautious about Verra Mobility. Here are three reasons why VRRM doesn’t excite us, plus one stock we’d rather own.
1. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Verra Mobility’s revenue to drop by 8.8%, a decrease from its 19.4% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Verra Mobility’s operating margin decreased by 9 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 13.6%.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Verra Mobility’s margin dropped by 21.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Verra Mobility’s free cash flow margin for the trailing 12 months was 9.6%.
Final Judgment
Verra Mobility isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 4.8× forward P/E (or $4.65 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
