Brookdale has been on fire lately. In the past six months alone, the company’s stock price has rocketed 63.4%, reaching $13.89 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Brookdale, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Brookdale Not Exciting?
Despite the momentum, we're swiping left on Brookdale for now. Here are three reasons why BKD doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Brookdale struggled to consistently generate demand over the last five years as its sales dropped at a 2% annual rate. This was below our standards and signals it’s a lower quality business.
2. Revenue Projections Show Stormy Skies Ahead
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 Brookdale’s revenue to drop by 5.2%, a decrease from its 2% annualized declines for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
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.
Brookdale’s $5.52 billion of debt exceeds the $279.1 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $457.8 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 16.7× forward EV-to-EBITDA (or $13.89 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
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