Over the past six months, Northwest Pipe has been a great trade. While the S&P 500 was flat, the stock price has climbed by 39.4% to $72.25 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Following the strength, is NWPX a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.

Why Does Northwest Pipe Spark Debate?

Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ: NWPX) is a manufacturer of pipeline systems for water infrastructure.

Two Things to Like:

1. Skyrocketing Revenue Shows Strong Momentum

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Northwest Pipe grew its sales at an excellent 13% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

2. Increasing Free Cash Flow Margin Juices Financials

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, Northwest Pipe’s margin expanded by 14.7 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Northwest Pipe’s free cash flow margin for the trailing 12 months was 9%.

One Reason to be Careful:

Low Gross Margin Reveals Weak Structural Profitability

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Northwest Pipe has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 18% gross margin over the last five years. That means Northwest Pipe paid its suppliers a lot of money ($81.95 for every $100 in revenue) to run its business.

Final Judgment

Northwest Pipe has huge potential even though it has some open questions, and with its shares outperforming the market lately, the stock trades at 17.2× forward P/E (or $72.25 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

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