Even though Reynolds (currently trading at $24.60 per share) has gained 7.3% over the last six months, it has lagged the S&P 500’s 21.3% return during that period. This might have investors contemplating their next move.

Is there a buying opportunity in Reynolds, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Reynolds Will Underperform?

We don't have much confidence in Reynolds. Here are three reasons why REYN doesn't excite us and a stock we'd rather own.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Reynolds’s average quarterly sales volumes have shrunk by 1.6% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Projected Revenue Growth Shows Limited Upside

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 Reynolds’s revenue to stall, close to This projection is underwhelming and implies its newer products will not catalyze better top-line performance yet.

3. Free Cash Flow Margin Dropping

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.

As you can see below, Reynolds’s margin dropped by 4.5 percentage points over the last year. This decrease warrants extra caution because Reynolds failed to grow its revenue organically. Its cash profitability could decay further if it tries to reignite growth through investments.

Final Judgment

Reynolds doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 14.5× forward P/E (or $24.60 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.

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