Over the past six months, Sinclair’s stock price fell to $13.84. Shareholders have lost 8.1% of their capital, which is disappointing considering the S&P 500 has climbed by 8.6%. This might have investors contemplating their next move.
Is now the time to buy Sinclair, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Sinclair Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons we avoid SBGI, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Sinclair struggled to consistently generate demand over the last five years as its sales dropped at a 11.4% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Sinclair’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
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.
Sinclair’s $4.57 billion of debt exceeds the $844 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $497 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. Sinclair 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 Sinclair can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Sinclair doesn’t pass our quality test. Following the recent decline, the stock trades at 21.8× forward P/E (or $13.84 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Sinclair
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