3 Reasons HTLD is Risky and 1 Stock to Buy Instead

Heartland Express has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.7%. The stock now trades at $10.82, marking a 25.3% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Heartland Express, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Heartland Express Will Underperform?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with HTLD and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Heartland Express grew its sales at a tepid 4.5% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Heartland Express’s margin dropped by 12.1 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Heartland Express’s free cash flow margin for the trailing 12 months was 7.8%.

3. New Investments Fail to Bear Fruit as ROIC Declines

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. Unfortunately, Heartland Express’s ROIC has decreased significantly 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

Heartland Express falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 7.7× forward EV-to-EBITDA (or $10.82 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Heartland Express

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