Over the past six months, Driven Brands’s shares (currently trading at $12.37) have posted a disappointing 18.2% loss, well below the S&P 500’s 2.5% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Driven Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Driven Brands Not Exciting?

Even though the stock has become cheaper, we don't have much confidence in Driven Brands. Here are three reasons there are better opportunities than DRVN and a stock we'd rather own.

1. Same-Store Sales Falling Behind Peers

In addition to reported revenue, same-store sales are a useful data point for analyzing Industrial & Environmental Services companies. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Driven Brands’s underlying demand characteristics.

Over the last two years, Driven Brands’s same-store sales averaged 2% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Driven Brands posted positive free cash flow this quarter, the broader story hasn’t been so clean. Driven Brands’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.7%, meaning it lit $5.74 of cash on fire for every $100 in revenue. This is a stark contrast from its adjusted operating margin, and its investments in working capital/capital expenditures are the primary culprit.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Driven Brands’s five-year average ROIC was negative 3.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.

Final Judgment

Driven Brands isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 10.1× forward P/E (or $12.37 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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