Forestar Group has been treading water for the past six months, recording a small return of 3.8% while holding steady at $28.09.
Is now the time to buy Forestar Group, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Forestar Group Will Underperform?
We're cautious about Forestar Group. Here are three reasons why FOR doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Forestar Group’s 8.8% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
2. 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.
While Forestar Group posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Forestar Group’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.7%, meaning it lit $4.69 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
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. On average, Forestar Group’s ROIC decreased by 1.9 percentage points annually each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Forestar Group, we’re out. That said, the stock currently trades at 10× forward P/E (or $28.09 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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