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 is one cash-producing company that leverages its financial strength to beat its competitors and two that may face some trouble.
Two stocks to sell:
Gates Industrial Corporation (GTES)
Trailing 12-month free cash flow margin: 9.7%
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 Is GTES Not Exciting?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share lagged its peers over the last five years as they only grew by 5.4% annually
- Underwhelming 6.9% return on capital reflects management’s difficulties in finding profitable growth opportunities
Gates Industrial Corporation’s stock price of $23.98 implies a valuation ratio of 13x forward P/E. Dive into our free research report to see why there are better opportunities than GTES.
Patterson-UTI (PTEN)
Trailing 12-month free cash flow margin: 5.5%
Operating 135 Tier-1 super-spec rigs that can handle the industry's most demanding drilling projects, Patterson-UTI (NASDAQ: PTEN) provides contract drilling rigs, hydraulic fracturing, and drill bits to oil and gas operators.
Why Are We Cautious About PTEN?
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 29.7%
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 3.1 percentage points
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $10.70 per share, Patterson-UTI trades at 33.4x forward P/E. To fully understand why you should be careful with PTEN, check out our full research report (it’s free).
One stock to watch:
Badger Meter (BMI)
Trailing 12-month free cash flow margin: 16.2%
The developer of the world’s first frost-proof water meter in 1905, Badger Meter (NYSE: BMI) provides water control and measure equipment to various industries.
Why Should BMI Be on Your Watchlist?
- Market share has increased this cycle as its 12.8% annual revenue growth over the last five years was exceptional
- Excellent operating margin of 18.2% highlights the efficiency of its business model, and it turbocharged its profits by achieving some fixed cost leverage
- Robust free cash flow margin of 15.9% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy
Badger Meter is trading at $163.80 per share, or 31.4x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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