Over the past six months, BeautyHealth’s stock price fell to $1.49. Shareholders have lost 18.1% of their capital, which is disappointing considering the S&P 500 has climbed by 10.4%. This might have investors contemplating their next move.
Is there a buying opportunity in BeautyHealth, 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.Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why you should be careful with SKIN and a stock we'd rather own.
Why Do We Think BeautyHealth Will Underperform?
Operating in the emerging beauty health category, the appropriately named BeautyHealth (NASDAQ:SKIN) is a skincare company best known for its Hydrafacial product that cleanses and hydrates skin.
1. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Unprofitable public companies are rare in the defensive consumer staples industry. Unfortunately, BeautyHealth was one of them over the last two years as its high expenses contributed to an average operating margin of negative 26.1%.
2. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for BeautyHealth, its EPS declined by 58% annually over the last three years while its revenue grew by 16.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
BeautyHealth burned through $13.61 million of cash over the last year, and its $556.2 million of debt exceeds the $358.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the BeautyHealth’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of BeautyHealth until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
BeautyHealth falls short of our quality standards. Following the recent decline, the stock trades at 37.1× forward price-to-earnings (or $1.49 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.
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