Shareholders of Park-Ohio would probably like to forget the past six months even happened. The stock dropped 37.6% and now trades at $18.80. This might have investors contemplating their next move.

Is there a buying opportunity in Park-Ohio, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we're cautious about Park-Ohio. Here are three reasons why you should be careful with PKOH and a stock we'd rather own.

Why Do We Think Park-Ohio Will Underperform?

Based in Cleveland, Park-Ohio (NASDAQ:PKOH) provides supply chain management services, capital equipment, and manufactured components.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Park-Ohio struggled to consistently increase demand as its $1.66 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Park-Ohio has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 15% gross margin over the last five years. Said differently, Park-Ohio had to pay a chunky $85.05 to its suppliers for every $100 in revenue.

3. Breakeven Free Cash Flow Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Park-Ohio broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Final Judgment

We see the value of companies helping their customers, but in the case of Park-Ohio, we’re out. After the recent drawdown, the stock trades at 5.1× forward price-to-earnings (or $18.80 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Like More Than Park-Ohio

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