3 Factors That Make AAON a Risky Choice and One Alternative Stock Worth Considering

AAON Stock Performance Overview

Currently, AAON is trading at $90.05 per share, closely mirroring the broader market with a 9.8% increase over the past six months. In comparison, the S&P 500 has delivered a 9.6% return during the same period.

Is AAON a smart addition to your portfolio, or does it carry unnecessary risk?

Why We’re Not Bullish on AAON

At this time, we’re choosing to stay on the sidelines regarding AAON. Here are three key reasons for our caution, along with a stock we prefer instead.

1. Declining Operating Profitability

Operating margin is a crucial indicator of a company’s core profitability, reflecting earnings before taxes and interest. Over the past five years, AAON’s operating margin has fallen by 6 percentage points. This decline is concerning, especially since revenue growth should have helped the company better manage its fixed costs and improve profitability. For the last twelve months, AAON’s operating margin stood at 10.1%.

AAON Trailing 12-Month Operating Margin (GAAP)

2. Modest EPS Growth

Examining the growth in earnings per share (EPS) helps determine if a company’s additional sales are translating into real profits. AAON’s EPS has increased at a modest 5.3% annualized rate over the past five years, which is significantly lower than its 20.4% annual revenue growth. This suggests that, as the company has grown, its profitability on a per-share basis has not kept pace.

AAON Trailing 12-Month EPS (Non-GAAP)

3. Worsening Free Cash Flow Margin

Free cash flow is a valuable metric because it accounts for all operational and capital expenses, making it difficult to manipulate. Over the last five years, AAON’s free cash flow margin has dropped by 27.2 percentage points. Any negative movement here is a red flag, especially since the company is already operating with negative cash flow. If this trend persists, it may indicate that AAON’s business is becoming more capital-intensive. For the trailing twelve months, the free cash flow margin was negative 18.4%.

AAON Trailing 12-Month Free Cash Flow Margin

Our Verdict

While AAON is not a poor business, it doesn’t make our list of top picks. The stock is currently valued at 46.8 times forward earnings (or $90.05 per share), indicating that much optimism is already reflected in the price. We believe there are more attractive investment opportunities available. Consider exploring instead.

Better Alternatives to AAON

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