Shareholders of Bally's would probably like to forget the past six months even happened. The stock dropped 30.8% and now trades at $12.87. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Bally's, 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 Bally's Will Underperform?
Despite the more favorable entry price, we're swiping left on Bally's for now. Here are three reasons we avoid BALY and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Bally’s recent performance shows its demand has slowed as its annualized revenue growth of 4.6% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. Note that COVID hurt Bally’s business in 2020 and part of 2021, and it bounced back in a big way thereafter. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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, Bally’s ROIC has decreased 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.
Bally’s $6.43 billion of debt exceeds the $906.7 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $503.8 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. Bally's 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 Bally's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Bally's, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 11.1× forward EV-to-EBITDA (or $12.87 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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