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.
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 that don’t make the cut and some better opportunities instead.
L.B. Foster (FSTR)
Trailing 12-Month Free Cash Flow Margin: 4.5%
Founded with a $2,500 loan, L.B. Foster (NASDAQ: FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.
Why Do We Avoid FSTR?
- Annual sales declines of 1.6% for the past five years show its products and services struggled to connect with the market during this cycle
- Low free cash flow margin of 0.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Underwhelming 4.5% return on capital reflects management’s difficulties in finding profitable growth opportunities
L.B. Foster is trading at $22.33 per share, or 10.8x forward P/E. To fully understand why you should be careful with FSTR, check out our full research report (it’s free).
Mercury Systems (MRCY)
Trailing 12-Month Free Cash Flow Margin: 13.1%
Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Why Do We Think MRCY Will Underperform?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Issuance of new shares over the last five years caused its earnings per share to fall by 22.5% annually while its revenue grew
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Mercury Systems’s stock price of $65.91 implies a valuation ratio of 71.8x forward P/E. Check out our free in-depth research report to learn more about why MRCY doesn’t pass our bar.
U.S. Physical Therapy (USPH)
Trailing 12-Month Free Cash Flow Margin: 8.3%
With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.
Why Are We Cautious About USPH?
- Subscale operations are evident in its revenue base of $729.6 million, meaning it has fewer distribution channels than its larger rivals
- 9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Waning returns on capital imply its previous profit engines are losing steam
At $84.47 per share, U.S. Physical Therapy trades at 32.6x forward P/E. Dive into our free research report to see why there are better opportunities than USPH.
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