3 Reasons CENT is Risky and 1 Stock to Buy Instead

Over the past six months, Central Garden & Pet has been a great trade, beating the S&P 500 by 7.2%. Its stock price has climbed to $40.51, representing a healthy 12.7% increase. This run-up might have investors contemplating their next move.

Is there a buying opportunity in Central Garden & Pet, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Central Garden & Pet Will Underperform?

Despite the momentum, we're swiping left on Central Garden & Pet for now. Here are three reasons why CENT doesn't excite us and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.

Central Garden & Pet’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 2% year on year.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Central Garden & Pet’s revenue to stall. While this projection suggests its newer products will spur better top-line performance, it is still below the sector average.

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).

Central Garden & Pet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.2%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Final Judgment

Central Garden & Pet falls short of our quality standards. With its shares beating the market recently, the stock trades at 17.8× forward P/E (or $40.51 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our all-time favorite software stocks.

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