Fortrea’s stock price has taken a beating over the past six months, shedding 80.8% of its value and falling to $4.18 per share. This might have investors contemplating their next move.
Is there a buying opportunity in Fortrea, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Fortrea Will Underperform?
Even with the cheaper entry price, we're swiping left on Fortrea for now. Here are three reasons why there are better opportunities than FTRE and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Fortrea struggled to consistently generate demand over the last three years as its sales dropped at a 4.4% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Fortrea’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
Fortrea’s $1.29 billion of debt exceeds the $101.6 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $205.7 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. Fortrea 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 Fortrea can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Fortrea, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 8.1× forward P/E (or $4.18 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Like More Than Fortrea
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
