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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Sally Beauty (SBH)
Trailing 12-Month Free Cash Flow Margin: 4%
Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE: SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.
Why Do We Pass on SBH?
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Revenue base of $3.70 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
At $10.28 per share, Sally Beauty trades at 5.3x forward P/E. If you’re considering SBH for your portfolio, see our FREE research report to learn more.
Otis (OTIS)
Trailing 12-Month Free Cash Flow Margin: 10.3%
Credited with inventing the first hydraulic passenger elevator, Otis Worldwide (NYSE: OTIS) is an elevator and escalator manufacturing, installation and service company.
Why Is OTIS Not Exciting?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Projected sales growth of 4% for the next 12 months suggests sluggish demand
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 2.8 percentage points
Otis is trading at $99.51 per share, or 23.8x forward P/E. Dive into our free research report to see why there are better opportunities than OTIS.
Ball (BALL)
Trailing 12-Month Free Cash Flow Margin: 2.4%
Started with a $200 loan in 1880, Ball (NYSE: BLL) manufactures aluminum packaging for beverages, personal care, and household products as well as aerospace systems and other technologies.
Why Are We Out on BALL?
- 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
- Low free cash flow margin of -0.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Ball’s stock price of $58.73 implies a valuation ratio of 16.2x forward P/E. To fully understand why you should be careful with BALL, check out our full research report (it’s free).
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