Hyster-Yale Materials Handling trades at $36.12 per share and has stayed right on track with the overall market, gaining 5.8% over the last six months. At the same time, the S&P 500 has returned 3.5%.

Is now the time to buy Hyster-Yale Materials Handling, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Hyster-Yale Materials Handling Will Underperform?

We're swiping left on Hyster-Yale Materials Handling for now. Here are three reasons we avoid HY and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Hyster-Yale Materials Handling’s 6% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.

2. Breakeven Free Cash Flow Limits Reinvestment Potential

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.

Hyster-Yale Materials Handling broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Hyster-Yale Materials Handling’s $376.7 million of debt exceeds the $123.2 million of cash on its balance sheet. Furthermore, its 12× net-debt-to-EBITDA ratio (based on its EBITDA of $20.4 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Hyster-Yale Materials Handling could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Hyster-Yale Materials Handling can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Hyster-Yale Materials Handling, we’ll be cheering from the sidelines. That said, the stock currently trades at 18.3× forward EV-to-EBITDA (or $36.12 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the most dominant software business in the world.

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