Forestar Group trades at $28.93 and has moved in lockstep with the market. Its shares have returned 5.5% over the last six months while the S&P 500 has gained 7.7%.
Is there a buying opportunity in Forestar Group, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Forestar Group Will Underperform?
We're sitting this one out for now. Here are three reasons there are better opportunities than FOR and a stock we'd rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Consumer Discretionary - Real Estate Services company because there’s a ceiling to what customers will pay.
Forestar Group’s number of lots sold came in at 1,944 in the latest quarter, and they averaged 26.8% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Forestar Group might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.
2. 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.
Over the last two years, Forestar Group’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 11.5%, meaning it lit $11.49 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
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, Forestar Group’s ROIC averaged 1.6 percentage point decreases each year 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
We see the value of companies helping consumers, but in the case of Forestar Group, we’re out. That said, the stock currently trades at 9.4× forward P/E (or $28.93 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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