What a brutal six months it’s been for Brookdale. The stock has dropped 23.8% and now trades at $10.58, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Brookdale, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Brookdale Not Exciting?
Even though the stock has become cheaper, we’re passing on Brookdale for now. Here are three reasons why BKD doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Brookdale struggled to consistently increase demand as its $3.05 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of lacking business quality.
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 3.8%, a decrease from its flat result for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
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 $5.47 billion of debt exceeds the $390.3 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $469.7 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 doesn’t pass our quality test. After the recent drawdown, the stock trades at 14.4× forward EV-to-EBITDA (or $10.58 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Brookdale
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