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. That said, here are three cash-producing companies that don’t make the cut and some better opportunities instead.
Sprout Social (SPT)
Trailing 12-Month Free Cash Flow Margin: 7.6%
Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ: SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.
Why Is SPT Not Exciting?
- Products, pricing, or go-to-market strategy may need some adjustments as its 11% average billings growth over the last year was weak
- Historical operating margin losses show it had an inefficient cost structure while scaling
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $11.47 per share, Sprout Social trades at 1.4x forward price-to-sales. If you’re considering SPT for your portfolio, see our FREE research report to learn more.
Post (POST)
Trailing 12-Month Free Cash Flow Margin: 5.5%
Founded in 1895, Post (NYSE: POST) is a packaged food company known for its namesake breakfast cereal and healthier-for-you snacks.
Why Do We Think Twice About POST?
- Shrinking unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Free cash flow margin shrank by 1.9 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
- ROIC of 5.8% reflects management’s challenges in identifying attractive investment opportunities
Post is trading at $104.02 per share, or 13.4x forward P/E. To fully understand why you should be careful with POST, check out our full research report (it’s free for active Edge members).
Mayville Engineering (MEC)
Trailing 12-Month Free Cash Flow Margin: 13.1%
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Does MEC Worry Us?
- Sales tumbled by 2% annually over the last two years, showing market trends are working against its favor during this cycle
- Gross margin of 12.8% reflects its high production costs
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Mayville Engineering’s stock price of $13.34 implies a valuation ratio of 29.5x forward P/E. Check out our free in-depth research report to learn more about why MEC doesn’t pass our bar.
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