Wabash has had an impressive run over the past six months as its shares have beaten the S&P 500 by 27.2%. The stock now trades at $12.63, marking a 40% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Wabash, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Wabash Will Underperform?
We’re glad investors have benefited from the price increase, but we’re passing on Wabash for now. Here are three reasons why there are better opportunities than WNC, plus one stock we’d rather own.
1. Backlog Declines as Orders Drop
Investors interested in Heavy Transportation Equipment companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Wabash’s future revenue streams.
Wabash’s backlog came in at $956 million in the latest quarter, and it averaged 24.9% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
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).
Over the last few years, Wabash’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
Wabash burned through $42.92 million of cash over the last year, and its $522.9 million of debt exceeds the $71.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Wabash’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 Wabash until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Wabash doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 20.6× forward EV-to-EBITDA (or $12.63 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Wabash
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