Over the last six months, GMS’s shares have sunk to $84.32, producing a disappointing 9.4% loss - a stark contrast to the S&P 500’s 7.7% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

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Despite the more favorable entry price, we don't have much confidence in GMS. Here are three reasons why you should be careful with GMS and a stock we'd rather own.

Why Is GMS Not Exciting?

Founded in 1971, GMS (NYSE:GMS) distributes specialty building materials including wallboard, ceilings, and insulation products, to the construction industry.

1. Core Business Falling Behind as Demand Plateaus

We can better understand Building Material Distributors companies by analyzing their organic revenue. This metric gives visibility into GMS’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, GMS failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests GMS might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

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 GMS’s revenue to rise by 3%, close to its 3.4% annualized growth for the past two years. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

3. EPS Took a Dip Over the Last Two Years

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.

Sadly for GMS, its EPS declined by 8% annually over the last two years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

GMS isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 10.5× forward price-to-earnings (or $84.32 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d suggest looking at CrowdStrike, the most entrenched endpoint security platform.

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