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. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
The New York Times (NYT)
Trailing 12-Month Free Cash Flow Margin: 19.5%
Founded in 1851, The New York Times (NYSE: NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.
Why Do We Avoid NYT?
- Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Poor expense management has led to an operating margin of 14.2% that is below the industry average
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
The New York Times’s stock price of $64.49 implies a valuation ratio of 25.3x forward P/E. To fully understand why you should be careful with NYT, check out our full research report (it’s free for active Edge members).
Somnigroup (SGI)
Trailing 12-Month Free Cash Flow Margin: 10.3%
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Do We Steer Clear of SGI?
- Muted 14.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1 percentage points over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Somnigroup is trading at $91.50 per share, or 28.6x forward P/E. Check out our free in-depth research report to learn more about why SGI doesn’t pass our bar.
ADT (ADT)
Trailing 12-Month Free Cash Flow Margin: 16.9%
Founded in 1874 and headquartered in Boca Raton, Florida, ADT (NYSE: ADT) is a provider of security, automation, and smart home solutions, offering comprehensive services for home and business protection.
Why Should You Sell ADT?
- Sluggish trends in its customers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.2 percentage points
- Underwhelming 6.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $8.26 per share, ADT trades at 8.8x forward P/E. To fully understand why you should be careful with ADT, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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