A surplus of cash can mean financial stability, but it can also indicate a reluctance (or inability) to invest in growth. Some of these companies also face challenges like stagnating revenue, declining market share, or limited scalability.
Not all businesses with cash are winners, and that’s why we built StockStory - to help you separate the good from the bad. Keeping that in mind, here are three companies with net cash positions to avoid and some better alternatives instead.
Paylocity (PCTY)
Net Cash Position: $37.2 million (0.6% of Market Cap)
Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ: PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.
Why Does PCTY Worry Us?
- Average ARR growth of 13.4% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Estimated sales growth of 7% for the next 12 months implies demand will slow from its two-year trend
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
Paylocity is trading at $109.61 per share, or 3.2x forward price-to-sales. Read our free research report to see why you should think twice about including PCTY in your portfolio.
Lennar (LEN)
Net Cash Position: $1.21 billion (5.6% of Market Cap)
One of the largest homebuilders in America, Lennar (NYSE: LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.
Why Do We Pass on LEN?
- Backlog has dropped by 11.4% on average over the past two years, suggesting it’s losing orders as competition picks up
- Free cash flow margin shrank by 7.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
At $88.65 per share, Lennar trades at 14.6x forward P/E. If you’re considering LEN for your portfolio, see our FREE research report to learn more.
Exponent (EXPO)
Net Cash Position: $37.52 million (1.2% of Market Cap)
With a team of over 800 consultants holding advanced degrees in 90+ technical disciplines, Exponent (NASDAQ: EXPO) is a science and engineering consulting firm that investigates complex problems and provides expert analysis for clients across various industries.
Why Is EXPO Not Exciting?
- 4.4% annual revenue growth over the last two years was slower than its business services peers
- Free cash flow margin dropped by 7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Exponent’s stock price of $65.25 implies a valuation ratio of 5.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than EXPO.
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