3 Reasons to Avoid BTSG and 1 Stock to Buy Instead

Over the past six months, BrightSpring Health Services’s stock price fell to $20.33. Shareholders have lost 5.7% of their capital, which is disappointing considering the S&P 500 has climbed by 3.1%. This may have investors wondering how to approach the situation.

Is there a buying opportunity in BrightSpring Health Services, 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 Is BrightSpring Health Services Not Exciting?

Despite the more favorable entry price, we're swiping left on BrightSpring Health Services for now. Here are three reasons why you should be careful with BTSG and a stock we'd rather own.

1. EPS Trending Down

Analyzing the 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.

BrightSpring Health Services’s full-year EPS dropped 22.3%, or 7% annually, over the last three years. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.

2. 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, BrightSpring Health Services’s margin dropped by 4.9 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. BrightSpring Health Services’s free cash flow margin for the trailing 12 months was 1.1%.

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).

BrightSpring Health Services historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

Final Judgment

BrightSpring Health Services isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 31.6× forward P/E (or $20.33 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of BrightSpring Health Services

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