A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
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 to avoid and some better opportunities instead.
Gray Television (GTN)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Do We Steer Clear of GTN?
- Sales were flat over the last two years, indicating it’s failed to expand its business
- Free cash flow margin is forecasted to shrink by 5.7 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Gray Television’s stock price of $4.92 implies a valuation ratio of 0.7x forward EV-to-EBITDA. To fully understand why you should be careful with GTN, check out our full research report (it’s free for active Edge members).
Cummins (CMI)
Trailing 12-Month Free Cash Flow Margin: 4.9%
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE: CMI) offers engines and power systems.
Why Is CMI Not Exciting?
- Annual sales growth of 2.3% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
- Free cash flow margin shrank by 6.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Eroding returns on capital suggest its historical profit centers are aging
Cummins is trading at $417.97 per share, or 19.3x forward P/E. Dive into our free research report to see why there are better opportunities than CMI.
The Toro Company (TTC)
Trailing 12-Month Free Cash Flow Margin: 10.9%
Ceasing all production to support the war effort during World War II, Toro (NYSE: TTC) offers outdoor equipment for residential, commercial, and agricultural use.
Why Do We Pass on TTC?
- Sales tumbled by 2.4% annually over the last two years, showing market trends are working against its favor during this cycle
- Free cash flow margin dropped by 5.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital imply its previous profit engines are losing steam
At $75.66 per share, The Toro Company trades at 16.6x forward P/E. If you’re considering TTC for your portfolio, see our FREE research report to learn more.
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