While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
B&G Foods (BGS)
Trailing 12-Month Free Cash Flow Margin: 6.7%
Started as a small grocery store in New York City, B&G Foods (NYSE: BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.
Why Do We Think BGS Will Underperform?
- Annual sales declines of 3.9% for the past three years show its products struggled to connect with the market
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $4.42 per share, B&G Foods trades at 8.4x forward P/E. Dive into our free research report to see why there are better opportunities than BGS.
Builders FirstSource (BLDR)
Trailing 12-Month Free Cash Flow Margin: 7.5%
Headquartered in Irving, TX, Builders FirstSource (NYSE: BLDR) is a construction materials manufacturer that offers a variety of lumber and lumber-related building products.
Why Do We Think Twice About BLDR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 7.2% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Builders FirstSource’s stock price of $126.29 implies a valuation ratio of 20x forward P/E. Check out our free in-depth research report to learn more about why BLDR doesn’t pass our bar.
Lumen (LUMN)
Trailing 12-Month Free Cash Flow Margin: 9.1%
With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.
Why Do We Steer Clear of LUMN?
- Sales tumbled by 9.5% annually over the last five years, showing market trends are working against its favor during this cycle
- Sales were less profitable over the last five years as its earnings per share fell by 16.4% annually, worse than its revenue declines
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.2 percentage points
Lumen is trading at $7.25 per share, or 2.2x forward EV-to-EBITDA. To fully understand why you should be careful with LUMN, check out our full research report (it’s free for active Edge members).
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