A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Home Depot (HD)
Trailing 12-Month Free Cash Flow Margin: 7.7%
Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE:HD) is a home improvement retailer that sells everything from tools to building materials to appliances.
Why Does HD Worry Us?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.5% for the last three years
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 33.4%
Home Depot’s stock price of $321.33 implies a valuation ratio of 21.8x forward P/E. Read our free research report to see why you should think twice about including HD in your portfolio.
Brunswick (BC)
Trailing 12-Month Free Cash Flow Margin: 7.4%
Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.
Why Should You Dump BC?
- Annual revenue growth of 4.3% over the last five years was below our standards for the consumer discretionary sector
- Free cash flow margin is projected to show no improvement next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Brunswick is trading at $70.96 per share, or 17.2x forward P/E. If you’re considering BC for your portfolio, see our FREE research report to learn more.
L.B. Foster (FSTR)
Trailing 12-Month Free Cash Flow Margin: 4.7%
Founded with a $2,500 loan, L.B. Foster (NASDAQ:FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.
Why Is FSTR Not Exciting?
- Backlog growth averaged a weak 4.4% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
- Earnings per share were flat over the last five years and fell short of the peer group average
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $27.82 per share, L.B. Foster trades at 18.7x forward P/E. To fully understand why you should be careful with FSTR, check out our full research report (it’s free).
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