Even during a down period for the markets, The ONE Group has gone against the grain, climbing to $3.53. Its shares have yielded a 6% return over the last six months, beating the S&P 500 by 7.8%. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in The ONE Group, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think The ONE Group Will Underperform?
Despite the momentum, we don't have much confidence in The ONE Group. Here are three reasons why you should be careful with STKS and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
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.
The ONE Group’s demand has been shrinking over the last two years as its same-store sales have averaged 3.2% annual declines.
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.
The ONE Group’s full-year EPS turned negative over the last five years. We tend to steer our readers away from companies with falling EPS, especially restaurants, which are arguably some of the hardest businesses to manage because of constantly changing consumer tastes, input costs, and labor dynamics. If the tide turns unexpectedly, The ONE Group’s low margin of safety could leave its stock price susceptible to large downswings.
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.
The ONE Group’s $639.4 million of debt exceeds the $21.42 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $94.15 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. The ONE Group 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 The ONE Group can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
The ONE Group doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 1× forward EV-to-EBITDA (or $3.53 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 fast-growing restaurant franchise with an A+ ranch dressing sauce.
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