A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Sirius XM (SIRI)
Trailing 12-Month Free Cash Flow Margin: 15.9%
Known for its commercial-free music channels, Sirius XM (NASDAQ: SIRI) is a broadcasting company that provides satellite radio and online radio services across North America.
Why Do We Think SIRI Will Underperform?
- Sales trends were unexciting over the last five years as its 1% annual growth was below the typical consumer discretionary company
- Free cash flow margin is not anticipated to grow over the next year
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $26.75 per share, Sirius XM trades at 8.9x forward P/E. Read our free research report to see why you should think twice about including SIRI in your portfolio.
STERIS (STE)
Trailing 12-Month Free Cash Flow Margin: 16.4%
With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE: STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.
Why Do We Think Twice About STE?
- Muted 7.5% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Adjusted operating margin was unchanged over the last five years, suggesting it failed to gain leverage on its fixed costs
- Low returns on capital reflect management’s struggle to allocate funds effectively
STERIS’s stock price of $209.50 implies a valuation ratio of 19x forward P/E. To fully understand why you should be careful with STE, check out our full research report (it’s free).
Waste Connections (WCN)
Trailing 12-Month Free Cash Flow Margin: 12%
Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE: WCN) is North America's third-largest waste management company providing collection, disposal, and recycling services.
Why Does WCN Give Us Pause?
- Estimated sales growth of 5.4% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin dropped by 2.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
Waste Connections is trading at $154.86 per share, or 27.4x forward P/E. If you’re considering WCN for your portfolio, see our FREE research report to learn more.
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