Luxfer has had an impressive run over the past six months as its shares have beaten the S&P 500 by 16.1%. The stock now trades at $14.13, marking a 32.9% 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 Luxfer, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

We’re glad investors have benefited from the price increase, but we're cautious about Luxfer. Here are three reasons why you should be careful with LXFR and a stock we'd rather own.

Why Do We Think Luxfer Will Underperform?

With its magnesium alloys used in the construction of the famous Spirit of St. Louis aircraft, Luxfer (NYSE:LXFR) offers specialized materials, components, and gas containment devices to various industries.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luxfer struggled to consistently generate demand over the last five years as its sales dropped at a 3.3% annual rate. This was below our standards and signals it’s a low quality business.

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.

Sadly for Luxfer, its EPS declined by more than its revenue over the last five years, dropping 6.2% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. 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, Luxfer’s margin dropped by 6.4 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Luxfer’s free cash flow margin for the trailing 12 months was 8.4%.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Luxfer, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 13.3× forward price-to-earnings (or $14.13 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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