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.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Ruger (RGR)
Trailing 12-Month Free Cash Flow Margin: 7.1%
Founded in 1949, Ruger (NYSE: RGR) is an American manufacturer of firearms for the commercial sporting market.
Why Do We Think RGR Will Underperform?
- Sales tumbled by 3.9% annually over the last two years, showing consumer trends are working against its favor
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 14.6% annually while its revenue grew
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $37.07 per share, Ruger trades at 20.9x forward EV-to-EBITDA. If you’re considering RGR for your portfolio, see our FREE research report to learn more.
Hub Group (HUBG)
Trailing 12-Month Free Cash Flow Margin: 3.6%
Started with $10,000, Hub Group (NASDAQ: HUBG) is a provider of intermodal, truck brokerage, and logistics services, facilitating transportation solutions for businesses worldwide.
Why Are We Out on HUBG?
- Flat unit sales over the past two years imply it may need to invest in improvements to get back on track
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 37.1% annually, worse than its revenue
- Diminishing returns on capital suggest its earlier profit pools are drying up
Hub Group is trading at $37.52 per share, or 17.6x forward P/E. Check out our free in-depth research report to learn more about why HUBG doesn’t pass our bar.
TPI Composites (TPIC)
Trailing 12-Month Free Cash Flow Margin: 2.3%
Founded in 1968, TPI Composites (NASDAQ: TPIC) manufactures composite wind turbine blades and provides related precision molding and assembly systems.
Why Is TPIC Risky?
- Offerings couldn’t generate interest as its billings have averaged 11.5% declines over the past two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
TPI Composites’s stock price of $0.12 implies a valuation ratio of 0.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than TPIC.
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