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 avoid and some better opportunities instead.
Elastic (ESTC)
Trailing 12-Month Free Cash Flow Margin: 20.2%
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE:ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Does ESTC Give Us Pause?
- Annual revenue growth of 19% over the last three years was below our standards for the software sector
- Historical operating margin losses point to an inefficient cost structure
- Free cash flow margin is forecasted to shrink by 1.3 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Elastic’s stock price of $86.31 implies a valuation ratio of 5.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ESTC.
J&J Snack Foods (JJSF)
Trailing 12-Month Free Cash Flow Margin: 4.2%
Best known for its SuperPretzel soft pretzels and ICEE frozen drinks, J&J Snack Foods (NASDAQ:JJSF) produces a range of snacks and beverages and distributes them primarily to supermarket and food service customers.
Why Do We Think Twice About JJSF?
- Revenue base of $1.6 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its three-year trend
- Free cash flow margin dropped by 2.7 percentage points over the last year, implying the company became more capital intensive as competition picked up
J&J Snack Foods is trading at $103.53 per share, or 19.4x forward P/E. Check out our free in-depth research report to learn more about why JJSF doesn’t pass our bar.
Crane (CR)
Trailing 12-Month Free Cash Flow Margin: 13%
Based in Connecticut, Crane (NYSE:CR) is a diversified manufacturer of engineered industrial products, including fluid handling, and aerospace technologies.
Why Should You Dump CR?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.1% annually over the last five years
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share fell by 6.7% annually over the last two years while its revenue grew, partly because it diluted shareholders
At $182.79 per share, Crane trades at 31.1x forward P/E. Read our free research report to see why you should think twice about including CR in your portfolio.
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