The past six months have been a windfall for Vestis’s shareholders. The company’s stock price has jumped 74.8%, hitting $8.01 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Vestis, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Vestis Will Underperform?
Despite the momentum, we're cautious about Vestis. Here are three reasons why VSTS doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Vestis’s 1.8% annualized revenue growth over the last four years was sluggish. This fell short of our benchmarks.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Vestis’s full-year EPS turned negative over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Vestis’s low margin of safety could leave its stock price susceptible to large downswings.
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.
Vestis’s $1.41 billion of debt exceeds the $41.55 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $246.7 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. Vestis 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 Vestis can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Vestis doesn’t pass our quality test. Following the recent surge, the stock trades at 18.5× forward P/E (or $8.01 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Vestis
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