What a brutal six months it’s been for Edgewell Personal Care. The stock has dropped 37.2% and now trades at $16.43, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Edgewell Personal Care, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Edgewell Personal Care Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Edgewell Personal Care. 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 an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Analyzing the trend in its profitability, Edgewell Personal Care’s operating margin decreased by 4.5 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 4.3%.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Edgewell Personal Care’s margin dropped by 5.9 percentage points over the last year. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Edgewell Personal Care’s free cash flow margin for the trailing 12 months was 1.9%.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Edgewell Personal Care, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 6.7× forward P/E (or $16.43 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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