Shareholders of Monro would probably like to forget the past six months even happened. The stock dropped 41% and now trades at $12.70. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Monro, 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 Monro Will Underperform?
Despite the more favorable entry price, we’re passing on Monro for now. Here are three reasons why MNRO doesn’t excite us, plus one stock we’d rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Monro’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. EPS Trending Down
Analyzing the long-term 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.
Sadly for Monro, its EPS declined by 54.2% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
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.
Monro’s $527.8 million of debt exceeds the $9.53 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $86.96 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. Monro 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 Monro 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 serving everyday consumers, but in the case of Monro, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 57.5× forward P/E (or $12.70 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Monro
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