What a brutal six months it’s been for Fortrea. The stock has dropped 63.4% and now trades at $6.26, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Fortrea, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Fortrea Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than FTRE and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Fortrea’s demand was weak and its revenue declined by 4.1% per year. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the 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 Fortrea, its EPS declined by 49.5% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
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.
Fortrea’s $1.20 billion of debt exceeds the $118.5 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $202.5 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. Fortrea 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 Fortrea can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Fortrea falls short of our quality standards. After the recent drawdown, the stock trades at 4.8× forward P/E (or $6.26 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Like More Than Fortrea
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