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 are three cash-producing companies to steer clear of and a few better alternatives.
NXP Semiconductors (NXPI)
Trailing 12-Month Free Cash Flow Margin: 21.5%
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
Why Is NXPI Not Exciting?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.5% annually over the last two years
- Anticipated sales growth of 14.6% for the next year implies demand will be shaky
At $317 per share, NXP Semiconductors trades at 20.3x forward P/E. If you’re considering NXPI for your portfolio, see our FREE research report to learn more.
Fortune Brands (FBIN)
Trailing 12-Month Free Cash Flow Margin: 7.7%
Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE: FBIN) makes plumbing, security, and outdoor living products.
Why Should You Sell FBIN?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
Fortune Brands’s stock price of $37.86 implies a valuation ratio of 11.5x forward P/E. To fully understand why you should be careful with FBIN, check out our full research report (it’s free).
Option Care Health (OPCH)
Trailing 12-Month Free Cash Flow Margin: 3.8%
With a nationwide network of 177 locations serving 43 states and a team of over 4,500 clinicians, Option Care Health (NASDAQ: OPCH) is the largest independent provider of home and alternate site infusion services, delivering medications and clinical support to patients across the United States.
Why Does OPCH Give Us Pause?
- Estimated sales growth of 2.5% for the next 12 months implies demand will slow from its two-year trend
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 1.7 percentage points
Option Care Health is trading at $20.75 per share, or 10.6x forward P/E. Read our free research report to see why you should think twice about including OPCH in your portfolio.
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