Alta’s stock price has taken a beating over the past six months, shedding 26% of its value and falling to $7.74 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.

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

Despite the more favorable entry price, we're swiping left on Alta for now. Here are three reasons why we avoid ALTG and a stock we'd rather own.

Why Is Alta Not Exciting?

Founded in 1984, Alta Equipment Group (NYSE:ALTG) is a provider of industrial and construction equipment and services across the Midwest and Northeast United States.

1. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Alta was profitable over the last five years but held back by its large cost base. Its average operating margin of 1.7% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Alta’s earnings losses deepened over the last four years as its EPS dropped 34% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Alta’s low margin of safety could leave its stock price susceptible to large downswings.

3. Cash Burn Ignites Concerns

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.

While Alta posted positive free cash flow this quarter, the broader story hasn’t been so clean. Alta’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.8%, meaning it lit $2.83 of cash on fire for every $100 in revenue.

Final Judgment

Alta isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 1.3× forward EV-to-EBITDA (or $7.74 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at Cloudflare, one of our top software picks that could be a home run with edge computing.

Stocks We Like More Than Alta

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