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.
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 that don’t make the cut and some better opportunities instead.
Gates Industrial Corporation (GTES)
Trailing 12-Month Free Cash Flow Margin: 10.8%
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE:GTES) offers power transmission and fluid transfer equipment for various industries.
Why Does GTES Give Us Pause?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.2% annually
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Gates Industrial Corporation is trading at $26.19 per share, or 14.9x forward P/E. Dive into our free research report to see why there are better opportunities than GTES.
Connection (CNXN)
Trailing 12-Month Free Cash Flow Margin: 1.1%
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Does CNXN Worry Us?
- Annual revenue growth of 2.3% over the last five years was below our standards for the business services sector
- Earnings per share lagged its peers over the last two years as they only grew by 8.4% annually
- Low free cash flow margin of 2.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Connection’s stock price of $78.01 implies a valuation ratio of 18.2x forward P/E. If you’re considering CNXN for your portfolio, see our FREE research report to learn more.
Goodyear (GT)
Trailing 12-Month Free Cash Flow Margin: 1.1%
With its iconic blimp floating above major sporting events since 1925, Goodyear (NASDAQ:GT) is one of the world's largest tire manufacturers, producing and selling tires for automobiles, trucks, aircraft, and other vehicles, along with related services.
Why Are We Out on GT?
- Annual sales declines of 4.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share fell by 17.7% annually over the last five years while its revenue grew, partly because it diluted shareholders
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $5.99 per share, Goodyear trades at 0.1x forward price-to-sales. To fully understand why you should be careful with GT, check out our full research report (it’s free).
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