Universal Logistics has been treading water for the past six months, holding steady at $13.43. The stock also fell short of the S&P 500’s 13.3% gain during that period.

Is there a buying opportunity in Universal Logistics, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Universal Logistics Will Underperform?

We're swiping left on Universal Logistics for now. Here are three reasons there are better opportunities than ULH and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Universal Logistics’s sales grew at a sluggish 1.6% compounded annual growth rate over the last five years. This fell short of our benchmarks.

2. 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, Universal Logistics’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Universal Logistics burned through $49.03 million of cash over the last year, and its $866.5 million of debt exceeds the $17.92 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Universal Logistics’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Universal Logistics until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Universal Logistics doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 16.8× forward P/E (or $13.43 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.

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