What a brutal six months it’s been for OneWater. The stock has dropped 47.1% and now trades at $16.13, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy OneWater, 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.
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than ONEW and a stock we'd rather own.
Why Is OneWater Not Exciting?
A public company since early 2020, OneWater Marine (NASDAQ:ONEW) sells boats, yachts, and other marine products.
1. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
OneWater has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 26.2% gross margin over the last two years. Said differently, OneWater had to pay a chunky $73.84 to its suppliers for every $100 in revenue. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
OneWater’s full-year EPS dropped 138%, or 24.2% annually, over the last four years. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.
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.
OneWater’s $564.5 million of debt exceeds the $16.85 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $82.46 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. OneWater 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 OneWater can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
OneWater isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 5.9× forward price-to-earnings (or $16.13 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.
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