Over the past six months, First Advantage’s stock price fell to $17.54. Shareholders have lost 8.9% of their capital, which is disappointing considering the S&P 500 has climbed by 1.7%. This might have investors contemplating their next move.
Is there a buying opportunity in First Advantage, 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 First Advantage Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than FA 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.
First Advantage’s full-year EPS dropped 26.7%, or 8.2% 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, First Advantage’s margin dropped by 17.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. First Advantage’s free cash flow margin for the trailing 12 months was negative 2.6%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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 Advantage burned through $27.58 million of cash over the last year, and its $2.14 billion of debt exceeds the $172.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the First Advantage’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of First Advantage until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
First Advantage isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 18.4× forward P/E (or $17.54 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.
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