Over the last six months, Driven Brands’s shares have sunk to $12.39, producing a disappointing 19% loss - a stark contrast to the S&P 500’s 5% gain. This might have investors contemplating their next move.
Is now the time to buy Driven Brands, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Driven Brands Not Exciting?
Even with the cheaper entry price, we're cautious about Driven Brands. Here are three reasons there are better opportunities than DRVN and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Investors interested in Industrial & Environmental Services companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Driven Brands’s underlying demand characteristics.
Over the last two years, Driven Brands’s same-store sales averaged 1.9% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
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 Driven Brands posted positive free cash flow this quarter, the broader story hasn’t been so clean. Driven Brands’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.6%, meaning it lit $5.62 of cash on fire for every $100 in revenue. This is a stark contrast from its adjusted operating margin, and its investments in working capital/capital expenditures are the primary culprit.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Driven Brands’s five-year average ROIC was negative 3.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
Final Judgment
Driven Brands’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 10.4× forward P/E (or $12.39 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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