Accel Entertainment’s 15.4% return over the past six months has outpaced the S&P 500 by 10.9%, and its stock price has climbed to $12 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Accel Entertainment, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Accel Entertainment Will Underperform?
We’re glad investors have benefited from the price increase, but we’re swiping left on Accel Entertainment for now. Here are three reasons you should be careful with ACEL and a stock we’d rather own.
1. Weak Growth in Video Gaming Terminals Sold Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Accel Entertainment, our preferred volume metric is video gaming terminals sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Accel Entertainment’s video gaming terminals sold came in at 27,950 in the latest quarter, and over the last two years, averaged 6.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Projected Free Cash Flow Gains to Pump Profits
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Accel Entertainment’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 4.7% for the last 12 months will increase to 5.8%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Accel Entertainment’s ROIC averaged 4.8 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Accel Entertainment falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 12.5× forward P/E (or $12 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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