MDU Resources currently trades at $20.69 per share and has shown little upside over the past six months, posting a middling return of 0.7%. The stock also fell short of the S&P 500’s 11% gain during that period.
Is there a buying opportunity in MDU Resources, 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 Do We Think MDU Resources Will Underperform?
We’re cautious about MDU Resources. Here are three reasons we avoid MDU, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. MDU Resources struggled to consistently generate demand over the last five years as its sales dropped at a 20.1% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
MDU Resources’s full-year EPS dropped 15% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, MDU Resources’s low margin of safety could leave its stock price susceptible to large downswings.
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, MDU Resources’s margin dropped by 16.8 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. MDU Resources’s free cash flow margin for the trailing 12 months was negative 20.2%.
Final Judgment
We see the value of companies helping their customers, but in the case of MDU Resources, we’re out. With its shares lagging the market recently, the stock trades at 20.2× forward P/E (or $20.69 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in – you can find more timely opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.
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