Over the past six months, Quanex’s shares (currently trading at $28.81) have posted a disappointing 9.6% loss, well below the S&P 500’s 13% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Quanex, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.Even with the cheaper entry price, we're swiping left on Quanex for now. Here are three reasons why NX doesn't excite us and a stock we'd rather own.
Why Is Quanex Not Exciting?
Starting in the seamless tube industry, Quanex (NYSE:NX) manufactures building products like window, door, kitchen, and bath cabinet components.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Quanex’s sales grew at a sluggish 3.8% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector. 
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
Quanex has weak unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 23.1% gross margin over the last five years. That means Quanex paid its suppliers a lot of money ($76.89 for every $100 in revenue) to run its business. 
3. EPS Growth Has Stalled Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Quanex’s flat EPS over the last two years was weak. On the bright side, this performance was better than its 5.3% annualized revenue declines.
Final Judgment
Quanex’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 10.4x forward price-to-earnings (or $28.81 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward Costco, one of Charlie Munger’s all-time favorite businesses.
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