Driven Brands currently trades at $17.10 per share and has shown little upside over the past six months, posting a middling return of 2.8%.

Is now the time to buy Driven Brands, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Driven Brands Not Exciting?

We don't have much confidence in Driven Brands. Here are three reasons why you should be careful with DRVN and a stock we'd rather own.

1. Core Business Falling Behind as Demand Plateaus

We can better understand Industrial & Environmental Services companies by analyzing their organic revenue. This metric gives visibility into Driven Brands’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Driven Brands failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Driven Brands might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Driven Brands’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

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.

Driven Brands’s $3.15 billion of debt exceeds the $152.4 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $546.8 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. Driven Brands 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 Driven Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Driven Brands isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 13.3× forward P/E (or $17.10 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 fairly confident there are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.

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