Over the past six months, Gorman-Rupp’s shares (currently trading at $35.29) have posted a disappointing 9.7% loss, well below the S&P 500’s 1.7% gain. This may have investors wondering how to approach the situation.

Is now the time to buy Gorman-Rupp, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Gorman-Rupp Not Exciting?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why GRC doesn't excite us and a stock we'd rather own.

1. Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Gorman-Rupp’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 7.1% over the last two years was well below its five-year trend.

2. Projected Revenue Growth Is Slim

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 Gorman-Rupp’s revenue to rise by 3.8%, a deceleration versus its 11.1% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

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, Gorman-Rupp’s margin dropped by 4.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Gorman-Rupp’s free cash flow margin for the trailing 12 months was 10%.

Final Judgment

Gorman-Rupp isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 16.4× forward P/E (or $35.29 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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