Since January 2020, the S&P 500 has delivered a total return of 84.6%. But one standout stock has more than doubled the market - over the past five years, Kadant has surged 226% to $351.01 per share. Its momentum hasn’t stopped as it’s also gained 17.1% in the last six months thanks to its solid quarterly results, beating the S&P by 9.8%.

Is there a buying opportunity in Kadant, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we're cautious about Kadant. Here are two reasons why KAI doesn't excite us and a stock we'd rather own.

Why Is Kadant Not Exciting?

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

1. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Kadant’s EPS grew at an unimpressive 6.4% compounded annual growth rate over the last two years, lower than its 7.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Kadant’s revenue to rise by 4.7%, a deceleration versus its 7.7% annualized growth for the past two years. This projection is underwhelming and implies its products and services will see some demand headwinds.

Final Judgment

Kadant’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 34.5× forward price-to-earnings (or $351.01 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Like More Than Kadant

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