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. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Nordstrom (JWN)
Trailing 12-Month Free Cash Flow Margin: 5.2%
Known for its exceptional customer service that features a ‘no questions asked’ return policy, Nordstrom (NYSE: JWN) is a high-end department store chain.
Why Should You Sell JWN?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Operating margin of 2.5% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Low returns on capital reflect management’s struggle to allocate funds effectively
Nordstrom’s stock price of $24.66 implies a valuation ratio of 11.8x forward P/E. Check out our free in-depth research report to learn more about why JWN doesn’t pass our bar.
Levi's (LEVI)
Trailing 12-Month Free Cash Flow Margin: 7.3%
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE: LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Do We Pass on LEVI?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
Levi's is trading at $17.83 per share, or 13.9x forward P/E. Read our free research report to see why you should think twice about including LEVI in your portfolio.
AMETEK (AME)
Trailing 12-Month Free Cash Flow Margin: 24.7%
Started from its humble beginnings in motor repair, AMETEK (NYSE: AME) manufactures electronic devices used in industries like aerospace, power, and healthcare.
Why Are We Wary of AME?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Estimated sales growth of 2.1% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin shrank by 2.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $179.50 per share, AMETEK trades at 24.7x forward P/E. To fully understand why you should be careful with AME, check out our full research report (it’s free).
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