Over the last six months, Brookdale’s shares have sunk to $5.81, producing a disappointing 15.9% loss - a stark contrast to the S&P 500’s 5.2% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.

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Despite the more favorable entry price, we don't have much confidence in Brookdale. Here are three reasons why BKD doesn't excite us and a stock we'd rather own.

Why Do We Think Brookdale Will Underperform?

Founded in 1978, Brookdale Senior Living (NYSE:BKD) offers independent living, assisted living, Alzheimer's and dementia care, rehabilitation, and skilled nursing care.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Brookdale struggled to consistently generate demand over the last five years as its sales dropped at a 5.1% annual rate. This wasn’t a great result and is a sign of poor business quality.

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.

Brookdale’s earnings losses deepened over the last five years as its EPS dropped 4.1% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Brookdale’s low margin of safety could leave its stock price susceptible to large downswings.

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.

Brookdale burned through $35.07 million of cash over the last year, and its $5.65 billion of debt exceeds the $328.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Brookdale’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 Brookdale until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping consumers, but in the case of Brookdale, we’re out. Following the recent decline, the stock trades at 3.1× forward EV-to-EBITDA (or $5.81 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.

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