Shareholders of Vestis would probably like to forget the past six months even happened. The stock dropped 62.7% and now trades at $5.82. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Vestis, 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 Vestis Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why we avoid VSTS and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Vestis’s 2.7% annualized revenue growth over the last four years was sluggish. This was below our standards. 
2. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Vestis’s full-year EPS turned negative over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Vestis’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Vestis’s margin dropped by 6 percentage points over the last four years. If its declines continue, it could signal increasing investment needs and capital intensity. Vestis’s free cash flow margin for the trailing 12 months was 1.8%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Vestis, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 7.3× forward P/E (or $5.82 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.
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