Over the past six months, Insteel’s stock price fell to $27.43. Shareholders have lost 12.7% of their capital, disappointing when considering the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is now the time to buy Insteel, 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.
Despite the more favorable entry price, we're swiping left on Insteel for now. Here are three reasons why you should be careful with IIIN and a stock we'd rather own.
Why Is Insteel Not Exciting?
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Insteel’s 3.6% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Insteel, its EPS declined by more than its revenue over the last two years, dropping 57.8%. This tells us the company struggled to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Insteel’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Insteel’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 19.1× forward price-to-earnings (or $27.43 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
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