3 Reasons to Sell VSTS and 1 Stock to Buy Instead

Over the past six months, Vestis has been a great trade, beating the S&P 500 by 5.1%. Its stock price has climbed to $6.70, representing a healthy 16.8% increase. This run-up might have investors contemplating their next move.

Is there a buying opportunity in Vestis, 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 for active Edge members.

Why Do We Think Vestis Will Underperform?

Despite the momentum, we're swiping left on Vestis for now. Here are three reasons we avoid VSTS and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last four years, Vestis grew its sales at a sluggish 2.5% compounded annual growth rate. This fell short of our benchmarks.

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, Vestis’s margin dropped by 6.1 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 breakeven.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Vestis’s $1.42 billion of debt exceeds the $29.75 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $257.4 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Vestis could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Vestis can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

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. With its shares topping the market in recent months, the stock trades at 18.3× forward P/E (or $6.70 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 a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Vestis

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