Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Simply Good Foods (SMPL)
Trailing 12-Month Free Cash Flow Margin: 8.6%
Best known for its Atkins brand that was inspired by the popular diet of the same name, Simply Good Foods (NASDAQ:SMPL) is a packaged food company whose offerings help customers achieve their healthy eating or weight loss goals.
Why Is SMPL Risky?
- Lackluster 5.2% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Estimated sales decline of 7.9% for the next 12 months implies a challenging demand environment
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 31.9 percentage points
Simply Good Foods is trading at $10.18 per share, or 6.1x forward P/E. To fully understand why you should be careful with SMPL, check out our full research report (it’s free).
Service International (SCI)
Trailing 12-Month Free Cash Flow Margin: 14.5%
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Why Do We Pass on SCI?
- Demand for its offerings was relatively low as its number of funeral services performed has underwhelmed
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Service International’s stock price of $86.19 implies a valuation ratio of 19.5x forward P/E. If you’re considering SCI for your portfolio, see our FREE research report to learn more.
Thermo Fisher (TMO)
Trailing 12-Month Free Cash Flow Margin: 15.8%
With over 14,000 sales personnel and a portfolio spanning more than 2,500 technology manufacturers, Thermo Fisher Scientific (NYSE:TMO) provides scientific equipment, reagents, consumables, software, and laboratory services to pharmaceutical, biotech, academic, and healthcare customers worldwide.
Why Are We Wary of TMO?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 5.1 percentage points
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 1.4% annually
At $574.30 per share, Thermo Fisher trades at 21.9x forward P/E. Check out our free in-depth research report to learn more about why TMO doesn’t pass our bar.
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