Genco has been treading water for the past six months, holding steady at $13.68.
Is now the time to buy Genco, 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 Genco Will Underperform?
We're sitting this one out for now. Here are three reasons why we avoid GNK and a stock we'd rather own.
1. Decline in owned vessels Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Genco, our preferred volume metric is owned vessels). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Genco’s owned vessels came in at 42 in the latest quarter, and over the last two years, averaged 1.9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Genco might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
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 Genco, its EPS declined by more than its revenue over the last two years, dropping 43.6%. This tells us the company struggled to adjust to shrinking demand.
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, Genco’s margin dropped by 6.5 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Genco’s free cash flow margin for the trailing 12 months was 14.9%.
Final Judgment
Genco doesn’t pass our quality test. That said, the stock currently trades at 20.7× forward P/E (or $13.68 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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