First Watch’s stock price has taken a beating over the past six months, shedding 25% of its value and falling to $11.62 per share. This might have investors contemplating their next move.
Is now the time to buy First Watch, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is First Watch Not Exciting?
Even though the stock has become cheaper, we're cautious about First Watch. Here are three reasons you should be careful with FWRG and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
First Watch’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.6% per year.
2. 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.
Over the last two years, First Watch’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.9%, meaning it lit $1.93 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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.
First Watch burned through $30.99 million of cash over the last year, and its $1.01 billion of debt exceeds the $21.25 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the First Watch’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of First Watch until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
First Watch isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 58.4× forward P/E (or $11.62 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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