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 avoid and some better opportunities instead.
Vishay Precision (VPG)
Trailing 12-Month Free Cash Flow Margin: 3.5%
Emerging from Vishay Intertechnology in 2010, Vishay Precision (NYSE: VPG) operates as a global provider of precision measurement and sensing technologies.
Why Should You Sell VPG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.2% annually over the last two years
- Earnings per share fell by 17.4% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Vishay Precision’s stock price of $35.96 implies a valuation ratio of 35.6x forward P/E. Check out our free in-depth research report to learn more about why VPG doesn’t pass our bar.
Ducommun (DCO)
Trailing 12-Month Free Cash Flow Margin: 5.1%
California’s oldest company, Ducommun (NYSE: DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
Why Does DCO Fall Short?
- Backlog growth averaged a weak 3.8% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.4% for the last five years
- ROIC of 4.5% reflects management’s challenges in identifying attractive investment opportunities
At $94 per share, Ducommun trades at 23.3x forward P/E. If you’re considering DCO for your portfolio, see our FREE research report to learn more.
Exact Sciences (EXAS)
Trailing 12-Month Free Cash Flow Margin: 5.8%
With a mission to detect cancer earlier when it's more treatable, Exact Sciences (NASDAQ: EXAS) develops and markets cancer screening and diagnostic tests, including its flagship Cologuard stool-based colorectal cancer screening test.
Why Are We Cautious About EXAS?
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Push for growth has led to negative returns on capital, signaling value destruction
Exact Sciences is trading at $63.69 per share, or 87.7x forward P/E. Read our free research report to see why you should think twice about including EXAS in your portfolio.
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