The past six months have been a windfall for Brookdale’s shareholders. The company’s stock price has jumped 41.5%, setting a new 52-week high of $8.93 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Brookdale, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is Brookdale Not Exciting?
Despite the momentum, we're cautious about Brookdale. Here are three reasons we avoid BKD and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Brookdale’s demand was weak and its revenue declined by 3.8% per year. This wasn’t a great result and is a sign of lacking business quality.
2. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Brookdale’s five-year average ROIC was negative 0.5%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Brookdale’s $5.55 billion of debt exceeds the $251.9 million of cash on its balance sheet. Furthermore, its 12× net-debt-to-EBITDA ratio (based on its EBITDA of $432 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. Brookdale 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 Brookdale can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Brookdale isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 4.5× forward EV-to-EBITDA (or $8.93 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
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