A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Travel + Leisure (TNL)
Trailing 12-Month Free Cash Flow Margin: 12.8%
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
Why Should You Dump TNL?
- Number of tours conducted has disappointed over the past two years, indicating weak demand for its offerings
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Travel + Leisure’s stock price of $71.44 implies a valuation ratio of 10x forward P/E. If you’re considering TNL for your portfolio, see our FREE research report to learn more.
Heartland Express (HTLD)
Trailing 12-Month Free Cash Flow Margin: 4.6%
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Are We Out on HTLD?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 17.8% annually over the last two years
- Free cash flow margin dropped by 19.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $9.31 per share, Heartland Express trades at 0.9x forward price-to-sales. Check out our free in-depth research report to learn more about why HTLD doesn’t pass our bar.
Helios (HLIO)
Trailing 12-Month Free Cash Flow Margin: 11.3%
Founded on the principle of treating others as one wants to be treated, Helios (NYSE: HLIO) designs, manufactures, and sells motion and electronic control components for various sectors.
Why Do We Think HLIO Will Underperform?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Helios is trading at $54.45 per share, or 19.2x forward P/E. To fully understand why you should be careful with HLIO, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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