Over the past six months, John Bean’s shares (currently trading at $120.06) have posted a disappointing 8.8% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in John Bean, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think John Bean Will Underperform?
Even with the cheaper entry price, we don't have much confidence in John Bean. Here are three reasons why there are better opportunities than JBTM and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into John Bean’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, John Bean’s organic revenue averaged 2.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
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, John Bean’s margin dropped by 6.6 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. John Bean’s free cash flow margin for the trailing 12 months was 9.9%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
John Bean’s $1.99 billion of debt exceeds the $101 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $349.7 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. John Bean could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope John Bean can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
John Bean doesn’t pass our quality test. Following the recent decline, the stock trades at 19.4× forward P/E (or $120.06 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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