Shareholders of New Fortress Energy would probably like to forget the past six months even happened. The stock dropped 45.8% and now trades at $1.09. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in New Fortress Energy, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is New Fortress Energy Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are two reasons there are better opportunities than NFE and a stock we'd rather own.
1. 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.
New Fortress Energy’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 71.3%, meaning it lit $71.26 of cash on fire for every $100 in revenue.
2. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
New Fortress Energy burned through $1.89 billion of cash over the last year, and its $9.33 billion of debt exceeds the $551.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the New Fortress Energy’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of New Fortress Energy until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
New Fortress Energy isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 81.1× forward EV-to-EBITDA (or $1.09 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 a safe-and-steady industrials business benefiting from an upgrade cycle.
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