Over the last six months, OneWater’s shares have sunk to $15.75, producing a disappointing 7.7% loss - a stark contrast to the S&P 500’s 4.3% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy OneWater, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is OneWater Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why ONEW doesn't excite us and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning 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 has been shrinking over the last two years as its same-store sales have averaged 1.4% annual declines.
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.
OneWater’s full-year EPS dropped significantly over the last four years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, OneWater’s low margin of safety could leave its stock price susceptible to large downswings.
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.
OneWater’s $566.1 million of debt exceeds the $67.46 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $66.82 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 isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 8.7× forward P/E (or $15.75 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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