Shareholders of OneWater would probably like to forget the past six months even happened. The stock dropped 30.2% and now trades at $10.48. This may have investors wondering how to approach the situation.

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

Why Do We Think OneWater Will Underperform?

Even though the stock has become cheaper, we're cautious about OneWater. Here are three reasons there are better opportunities than ONEW and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

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 53.6% annually over the last three years while its revenue grew by 1.9%. This tells us the company became less profitable on a per-share basis as it expanded.

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.

OneWater’s $526.7 million of debt exceeds the $32.23 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $71.81 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

We cheer for all companies serving everyday consumers, but in the case of OneWater, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 51× forward P/E (or $10.48 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 our favorite semiconductor picks and shovels play.

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