Over the past six months, Heartland Express’s shares (currently trading at $8.56) have posted a disappointing 17.1% loss, well below the S&P 500’s 8.8% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Heartland Express, 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 Heartland Express Will Underperform?
Even with the cheaper entry price, we're swiping left on Heartland Express for now. Here are three reasons we avoid HTLD and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Heartland Express’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 14.2% over the last two years. Heartland Express isn’t alone in its struggles as the Ground Transportation industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, Heartland Express’s margin dropped by 12.7 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 6.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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 doesn’t pass our quality test. Following the recent decline, the stock trades at 7.9× forward EV-to-EBITDA (or $8.56 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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