Shareholders of PAR Technology would probably like to forget the past six months even happened. The stock dropped 55.8% and now trades at $16.73. This might have investors contemplating their next move.
Is there a buying opportunity in PAR Technology, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is PAR Technology Not Exciting?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons why PAR doesn’t excite us, plus one stock we’d rather own.
1. Cash Burn Ignites Concerns
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.
PAR Technology’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 12.4%, meaning it lit $12.40 of cash on fire for every $100 in revenue.
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
PAR Technology’s five-year average ROIC was negative 8.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
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.
PAR Technology’s $433.8 million of debt exceeds the $77.81 million of cash on its balance sheet. Furthermore, its 13× net-debt-to-EBITDA ratio (based on its EBITDA of $27.38 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. PAR Technology 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 PAR Technology can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
PAR Technology’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 23.3× forward P/E (or $16.73 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. Let us point you toward the most dominant software business in the world.
Stocks We Like More Than PAR Technology
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