Over the last six months, OneWater’s shares have sunk to $12.56, producing a disappointing 15.8% loss - a stark contrast to the S&P 500’s 11.5% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in OneWater, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think OneWater Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with ONEW and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

OneWater’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.

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.

Sadly for OneWater, its EPS declined by 66.6% annually over the last three years while its revenue grew by 2.4%. This tells us the company became less profitable on a per-share basis as it expanded.

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.

OneWater’s $544.7 million of debt exceeds the $52.17 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $70.11 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. OneWater 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 OneWater can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

OneWater falls short of our quality standards. Following the recent decline, the stock trades at 19.8× forward P/E (or $12.56 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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