Shareholders of First Watch would probably like to forget the past six months even happened. The stock dropped 26.8% and now trades at $12.42. This might have investors contemplating their next move.
Is there a buying opportunity in First Watch, 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.
Why Is First Watch Not Exciting?
Despite the more favorable entry price, we don’t have much confidence in First Watch. Here are three reasons we avoid FWRG, plus one stock we’d rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
First Watch’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.8% per year.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While First Watch posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, First Watch’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.5%, meaning it lit $1.48 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
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.
First Watch’s $1.03 billion of debt exceeds the $23.57 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $126 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. First Watch 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 First Watch can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
First Watch isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 61.2× forward P/E (or $12.42 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Like More Than First Watch
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