Does Recent IPO Company Beauty Health Deserve a Place in Your Portfolio?

The Beauty Health Company (SKIN) went public through a SPAC deal on May 6, following which the stock has gained in double-digits. However, with mixed financials and anticipated negative consequences of the COVID-19 Delta variant surge, is SKIN an ideal addition to one’s portfolio? Read more to find out.

The HydraFacial® Company went public on May 6 through a reverse merger with special purpose acquisition company Vesper Healthcare Acquisition Corp. The combined company was renamed The Beauty Health Company (SKIN), with a pro forma enterprise value of $1.10 billion.

The company's stock has gained 75.2% in price since it began trading, outperforming the benchmark S&P 500 index’s 5.6% returns.

Here’s what could shape SKIN’s performance in the near term:

Effects of Surge in COVID-19 Cases

SKIN’s growth prospects are heavily dependent on a reopening global market. So, the renewed restrictions in several countries due to the rapid spread of the COVID-19 Delta variant  are reducing foot traffic in SKIN’s stores, which is expected to negatively impact its financials in the near term. In addition, with a decelerating vaccine rollout as the United States hit its 70% vaccination mark over  a month late, people are reluctant to visit crowded public places, which is expected to adversely affect SKIN’s operations adversely.

Bleak Financials

SKIN’s trailing-12-month revenues came in at $186.49 million, reflecting a 28.5% decline year-over-year. Furthermore , the company’s operating and net losses stood at $25.90 million and $152.36 million, respectively. Its net operating cash flow is negative $32.47 million.

SKIN’s ROA and ROTC are negative 44.48% and 5.73%, respectively. Its 0.53% trailing 120- month asset turnover ratio is 36.1% lower than the 0.83% industry average.

Mixed Second Quarter Results

SKIN’s revenues increased 1000% year-over-year to $47.30 million in its fiscal second quarter, ended June 30. This can be attributed to a 481.7% rise in Delivery Systems net sales and a 290.1% rise in Consumables net sales. Its adjusted EBITDA came in at $11.40 million, up 1,136.4% from the same period last year. However, the company’s net loss increased by 1,240.4% from the prior-year quarter to $139.40 million.

Operational Inefficiencies

SKIN’s revenues and delivery systems grew at a 26% and 28% CAGR, respectively, from 2016 - 2019. However, despite robust top-line growth, the company’s adjusted EBITDA declined at a 17% rate per annum over this period.

Also, the company has previously identified a material weakness in its internal financial reporting controls, rendering its disclosure control and procedures ineffective as of December 31, 2020. As a result, unless SKIN develops an efficient internal control system, it might not accurately report its quarterly results. Also, the company is prone to litigation risks regarding this material weakness in financial reporting.

Stretched Valuation

In terms of forward Price/Sales, SKIN is currently trading at 12.44x, which is 706.9% higher than the 1.54x industry average. Likewise, its 109.35 forward EV/EBITDA multiple is 749% higher than the 12.88 industry average.

Also, the stock’s 172.90 trailing-12-month Price/Book ratio compares well with the 3.25 industry average.

POWR Ratings Reflect Bleak Prospects

SKIN has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SKIN has a D grade for Value. This is consistent with the stock’s higher-than-industry valuation.

Of the 73 stocks in the D-rated Consumer Goods industry, SKIN is ranked #57.

Beyond what we’ve stated above, we have rated SKIN for Growth, Momentum, Sentiment, Stability, and Quality. Get all SKIN Ratings here.

Bottom Line

As an emerging growth company in the beauty health industry, SKIN’s products are widely used worldwide. However, despite its strong market presence in more than 87 countries, SKIN’s profit margins have remained negative in the most recent quarter. Furthermore, SKIN might incur substantial losses due to regulatory actions by the FTA, FTC, and CPSC in the United States, as stated in its IPO prospectus.

How Does The Beauty Health Company (SKIN) Stack Up Against its Peers?

While SKIN has an overall D (Sell) rating, one might want to consider taking a look at its industry peers Ennis, Inc. (EBF) and Société BIC SA (BICEY), which have A (Strong Buy) ratings.

SKIN shares were trading at $21.46 per share on Thursday afternoon, down $0.69 (-3.12%). Year-to-date, SKIN has gained 89.74%, versus a 17.97% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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