First Advantage trades at $14.91 and has moved in lockstep with the market. Its shares have returned 16.9% over the last six months while the S&P 500 has gained 13.2%.
Is now the time to buy First Advantage, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is First Advantage Not Exciting?
We don't have much confidence in First Advantage. Here are three reasons you should be careful with FA and a stock we'd rather own.
1. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
First Advantage’s full-year EPS grew at a weak 1.6% compounded annual growth rate over the last four years, worse than the broader business services sector.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, First Advantage’s margin dropped by 7.9 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. First Advantage’s free cash flow margin for the trailing 12 months was 10.3%.
3. Previous Growth Initiatives Haven’t Impressed
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).
First Advantage historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
First Advantage isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 12.2× forward P/E (or $14.91 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
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