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.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Huntington Ingalls (HII)
Trailing 12-month free cash flow margin: 2.5%
Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE: HII) develops marine vessels and their mission systems and maintenance services.
Why Is HII Risky?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.1% for the last five years
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 2.2% annually
- ROIC of 7.6% reflects management’s challenges in identifying attractive investment opportunities
Huntington Ingalls’s stock price of $317.10 implies a valuation ratio of 15.9x forward P/E. Read our free research report to see why you should think twice about including HII in your portfolio.
Vontier (VNT)
Trailing 12-month free cash flow margin: 12.5%
A spin-off of a spin-off, Vontier (NYSE: VNT) provides electronic products and systems to the transportation, automotive, and manufacturing sectors.
Why Does VNT Worry Us?
- 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
- Sales are projected to tank by 1.7% over the next 12 months as demand evaporates
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 2.7% annually
Vontier is trading at $35.60 per share, or 9.9x forward P/E. To fully understand why you should be careful with VNT, check out our full research report (it’s free).
Toll Brothers (TOL)
Trailing 12-month free cash flow margin: 10.1%
Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE: TOL) is a luxury homebuilder across the United States.
Why Does TOL Give Us Pause?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 8.1% declines over the past two years
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
At $145.50 per share, Toll Brothers trades at 10.8x forward P/E. Check out our free in-depth research report to learn more about why TOL doesn’t pass our bar.
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