Over the past six months, Matson’s stock price fell to $107. Shareholders have lost 6.1% of their capital, which is disappointing considering the S&P 500 has climbed by 17.2%. This might have investors contemplating their next move.
Is now the time to buy Matson, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Is Matson Not Exciting?
Despite the more favorable entry price, we're cautious about Matson. Here are three reasons we avoid MATX 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. Matson’s recent performance shows its demand has slowed as its annualized revenue growth of 4.3% over the last two years was below its five-year trend. We also note many other Marine Transportation businesses have faced declining sales because of cyclical headwinds. While Matson grew slower than we’d like, it did do better than its peers. 
2. 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, Matson’s margin dropped by 8.3 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Matson’s free cash flow margin for the trailing 12 months was 4.1%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Over the last few years, Matson’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Matson’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 9.4× forward P/E (or $107 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward the most dominant software business in the world.
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