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.
Bloomin' Brands (BLMN)
Trailing 12-Month Free Cash Flow Margin: 1.5%
Owner of the iconic Australian-themed Outback Steakhouse, Bloomin’ Brands (NASDAQ: BLMN) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.
Why Is BLMN Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Sales are projected to tank by 2.2% over the next 12 months as demand evaporates further
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Bloomin' Brands’s stock price of $7.16 implies a valuation ratio of 5.5x forward P/E. Check out our free in-depth research report to learn more about why BLMN doesn’t pass our bar.
Compass (COMP)
Trailing 12-Month Free Cash Flow Margin: 2.3%
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE: COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Do We Think Twice About COMP?
- Demand for its offerings was relatively low as its number of principal agents has underwhelmed
- Persistent operating margin losses suggest the business manages its expenses poorly
- Low free cash flow margin of 1.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Compass is trading at $9.50 per share, or 21.5x forward P/E. Dive into our free research report to see why there are better opportunities than COMP.
FactSet (FDS)
Trailing 12-Month Free Cash Flow Margin: 25.2%
Founded in 1978 when financial data was still primarily delivered through paper reports, FactSet (NYSE: FDS) provides financial data, analytics, and technology solutions that investment professionals use to research, analyze, and manage their portfolios.
Why Does FDS Worry Us?
- Muted 5.6% annual revenue growth over the last two years shows its demand lagged behind its financials peers
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6.4% annually
At $382.65 per share, FactSet trades at 21.5x forward P/E. To fully understand why you should be careful with FDS, check out our full research report (it’s free).
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