Brookdale’s 38.6% return over the past six months has outpaced the S&P 500 by 30.6%, and its stock price has climbed to $15.59 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Brookdale, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Brookdale Not Exciting?
Despite the momentum, we don’t have much confidence in Brookdale. Here are three reasons you should be careful with BKD, 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 $3.15 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 4.3%, a decrease from its flat result for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
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.
Brookdale’s $5.51 billion of debt exceeds the $270.1 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $464.7 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. With its shares outperforming the market lately, the stock trades at 17.2× forward EV-to-EBITDA (or $15.59 per share). Beauty is in the eye of the beholder, 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 recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Brookdale
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