A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Columbus McKinnon (CMCO)
Trailing 12-Month Free Cash Flow Margin: 1.9%
With 19 different brands across the globe, Columbus McKinnon (NASDAQ: CMCO) offers material handling equipment for the construction, manufacturing, and transportation industries.
Why Do We Pass on CMCO?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Earnings per share fell by 9.3% annually over the last two years while its revenue was flat, showing each sale was less profitable
- 7.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Columbus McKinnon is trading at $15.15 per share, or 5.9x forward P/E. Check out our free in-depth research report to learn more about why CMCO doesn’t pass our bar.
Hologic (HOLX)
Trailing 12-Month Free Cash Flow Margin: 23.1%
As a pioneer in 3D mammography technology that has revolutionized breast cancer detection, Hologic (NASDAQ: HOLX) develops and manufactures diagnostic products, medical imaging systems, and surgical devices focused primarily on women's health and wellness.
Why Are We Hesitant About HOLX?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 23.6 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $72.15 per share, Hologic trades at 16.3x forward P/E. Read our free research report to see why you should think twice about including HOLX in your portfolio.
Allstate (ALL)
Trailing 12-Month Free Cash Flow Margin: 13.1%
Born from a Sears, Roebuck & Co. initiative during the Great Depression with its famous "You're in good hands" slogan, Allstate (NYSE: ALL) is one of America's largest personal property and casualty insurers, offering protection for autos, homes, and personal property.
Why Do We Think Twice About ALL?
- Estimated sales growth of 3.7% for the next 12 months implies demand will slow from its two-year trend
- Operational productivity has decreased over the last four years as its combined ratio worsened by 4.8 percentage points
- Book value per share was flat over the last five years, indicating it’s failed to build equity value this cycle
Allstate’s stock price of $193.98 implies a valuation ratio of 2x forward P/B. To fully understand why you should be careful with ALL, check out our full research report (it’s free for active Edge members).
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