Monarch (MCRI): Buy, Sell, or Hold Post Q3 Earnings?

Monarch has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 18.1% to $99.46 per share while the index has gained 13.6%.

Is now the time to buy Monarch, 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 for active Edge members.

Why Do We Think Monarch Will Underperform?

We're swiping left on Monarch for now. Here are three reasons you should be careful with MCRI and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Monarch grew its sales at a 23.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Projected Free Cash Flow Gains to Pump Profits

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.

Over the next year, analysts predict Monarch’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 26.3% for the last 12 months will increase to 27.2%, it options for capital deployment (investments, share buybacks, etc.).

3. New Investments Bear Fruit as ROIC Jumps

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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, Monarch’s ROIC averaged 3 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Final Judgment

Monarch doesn’t pass our quality test. That said, the stock currently trades at 17.4× forward P/E (or $99.46 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.

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