Over the past six months, Edgewell Personal Care has been a great trade, beating the S&P 500 by 15.6%. Its stock price has climbed to $23.76, representing a healthy 20.6% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Edgewell Personal Care, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Edgewell Personal Care Will Underperform?
We’re happy investors have made money, but we're swiping left on Edgewell Personal Care for now. Here are three reasons we avoid EPC and a stock we'd rather own.
1. Core Business Falling Behind as Organic Growth Slumps
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
The demand for Edgewell Personal Care’s products has barely risen over the last eight quarters. On average, the company’s organic sales have been flat. 
2. Shrinking Operating Margin
Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
Looking at the trend in its profitability, Edgewell Personal Care’s operating margin decreased by 6.4 percentage points over the last year. Edgewell Personal Care’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 2%.
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.
Edgewell Personal Care’s $1.55 billion of debt exceeds the $223.3 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $239.2 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. Edgewell Personal Care 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 Edgewell Personal Care can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Edgewell Personal Care, we’re out. With its shares outperforming the market lately, the stock trades at 10.9× forward P/E (or $23.76 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
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