Over the past six months, Central Garden & Pet’s shares (currently trading at $32.58) have posted a disappointing 19.6% loss, well below the S&P 500’s 11.3% gain. This might have investors contemplating their next move.

Is now the time to buy Central Garden & Pet, 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 Do We Think Central Garden & Pet Will Underperform?

Even with the cheaper entry price, we're swiping left on Central Garden & Pet for now. Here are three reasons you should be careful with CENT and a stock we'd rather own.

1. Core Business Falling Behind as Organic Sales Decline

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.

Central Garden & Pet’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 2% year on year.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Central Garden & Pet’s revenue to stall. Although this projection implies its newer products will spur better top-line performance, it is still below the sector average.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Central Garden & Pet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.5%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Final Judgment

Central Garden & Pet doesn’t pass our quality test. Following the recent decline, the stock trades at 11.7× forward P/E (or $32.58 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.

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