Interface has been on fire lately. In the past six months alone, the company’s stock price has rocketed 40.3%, reaching $26.60 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Interface, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Interface Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than TILE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of 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, Interface grew its sales at a sluggish 1.8% compounded annual growth rate. This fell short of our benchmarks.
2. EPS Barely Growing
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.
Interface’s weak 2.5% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Interface historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.9%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
Interface falls short of our quality standards. Following the recent surge, the stock trades at 15.1× forward EV-to-EBITDA (or $26.60 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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