Over the past six months, Littelfuse has been a great trade, beating the S&P 500 by 24.7%. Its stock price has climbed to $401.52, representing a healthy 33.2% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Littelfuse, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Littelfuse Not Exciting?
Despite the momentum, we don’t have much confidence in Littelfuse. Here are three reasons why there are better opportunities than LFUS, plus one stock we’d rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Littelfuse’s recent performance shows its demand has slowed as its annualized revenue growth of 4.3% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Littelfuse’s operating margin decreased by 17.8 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 2.8%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Littelfuse’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Littelfuse isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 26.5× forward P/E (or $401.52 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Littelfuse
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