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.
Rapid7 (RPD)
Trailing 12-Month Free Cash Flow Margin: 18.3%
Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ: RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.
Why Does RPD Fall Short?
- Average billings growth of 4.6% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its three-year trend
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
Rapid7’s stock price of $23.54 implies a valuation ratio of 1.8x forward price-to-sales. To fully understand why you should be careful with RPD, check out our full research report (it’s free).
TreeHouse Foods (THS)
Trailing 12-Month Free Cash Flow Margin: 3.8%
Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.
Why Are We Out on THS?
- Declining unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Gross margin of 16.8% is below its competitors, leaving less money to invest in areas like marketing and production facilities
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
TreeHouse Foods is trading at $22.26 per share, or 9.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why THS doesn’t pass our bar.
YETI (YETI)
Trailing 12-Month Free Cash Flow Margin: 12%
Founded by two brothers from Texas, YETI (NYSE: YETI) specializes in durable outdoor goods including coolers, drinkware, and other gear tailored to adventure enthusiasts.
Why Are We Hesitant About YETI?
- Lackluster 7.1% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 6.3%
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $29.48 per share, YETI trades at 10x forward price-to-earnings. If you’re considering YETI for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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