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.
Cars.com (CARS)
Trailing 12-Month Free Cash Flow Margin: 15.8%
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.
Why Are We Wary of CARS?
- Dealer Customers have stagnated over the last two years, indicating its platform may be struggling to differentiate itself from competitors
- Estimated sales growth of 2% for the next 12 months implies demand will slow from its three-year trend
- Earnings per share have contracted by 1.8% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Cars.com is trading at $10.54 per share, or 3.1x forward EV/EBITDA. Read our free research report to see why you should think twice about including CARS in your portfolio.
Avery Dennison (AVY)
Trailing 12-Month Free Cash Flow Margin: 7.4%
Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
Why Are We Cautious About AVY?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Free cash flow margin dropped by 2.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Diminishing returns on capital suggest its earlier profit pools are drying up
Avery Dennison’s stock price of $176.61 implies a valuation ratio of 17.3x forward P/E. To fully understand why you should be careful with AVY, check out our full research report (it’s free for active Edge members).
Supernus Pharmaceuticals (SUPN)
Trailing 12-Month Free Cash Flow Margin: 27.9%
With a diverse portfolio of eight FDA-approved medications targeting neurological conditions, Supernus Pharmaceuticals (NASDAQ: SUPN) develops and markets treatments for central nervous system disorders including epilepsy, ADHD, Parkinson's disease, and migraine.
Why Do We Think Twice About SUPN?
- Muted 2.4% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Revenue base of $665.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $56.00 per share, Supernus Pharmaceuticals trades at 22.2x forward P/E. Check out our free in-depth research report to learn more about why SUPN doesn’t pass our bar.
Stocks We Like More
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