Even during a down period for the markets, BrightSpring Health Services has gone against the grain, climbing to $17.29. Its shares have yielded a 8.7% return over the last six months, beating the S&P 500 by 17.6%. This run-up might have investors contemplating their next move.
Is there a buying opportunity in BrightSpring Health Services, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We’re glad investors have benefited from the price increase, but we're swiping left on BrightSpring Health Services for now. Here are three reasons why BTSG doesn't excite us and a stock we'd rather own.
Why Is BrightSpring Health Services Not Exciting?
Founded in 1974, BrightSpring Health Services (NASDAQ: BTSG) offers home health care, hospice, neuro-rehabilitation, and pharmacy services.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Looking at the trend in its profitability, BrightSpring Health Services’s adjusted operating margin decreased by 1.3 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. BrightSpring Health Services’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was 3.4%.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, BrightSpring Health Services’s margin dropped by 6.2 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. BrightSpring Health Services’s free cash flow margin for the trailing 12 months was breakeven.
3. Previous Growth Initiatives Haven’t Impressed
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).
BrightSpring Health Services historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.
Final Judgment
BrightSpring Health Services isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 31.6× forward price-to-earnings (or $17.29 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
Stocks We Like More Than BrightSpring Health Services
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