What a brutal six months it’s been for OneWater. The stock has dropped 20.2% and now trades at $11.95, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in OneWater, 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.
Why Do We Think OneWater Will Underperform?
Even with the cheaper entry price, we're cautious about OneWater. Here are three reasons you should be careful with ONEW and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
OneWater’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
Note that OneWater reports its same-store sales intermittently, so some data points are missing in the chart below.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for OneWater, its EPS declined by 62.5% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
OneWater’s $477.7 million of debt exceeds the $68.36 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $70.29 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. OneWater could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope OneWater can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
OneWater doesn’t pass our quality test. Following the recent decline, the stock trades at 22.2× forward P/E (or $11.95 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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