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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
D.R. Horton (DHI)
Trailing 12-Month Free Cash Flow Margin: 8.1%
One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE: DHI) builds a variety of new construction homes across multiple markets.
Why Does DHI Worry Us?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 17% declines over the past two years
- Earnings per share have contracted by 5.8% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Eroding returns on capital suggest its historical profit centers are aging
D.R. Horton is trading at $171.43 per share, or 14.5x forward P/E. Read our free research report to see why you should think twice about including DHI in your portfolio.
NerdWallet (NRDS)
Trailing 12-Month Free Cash Flow Margin: 8.3%
Born from founder Tim Chen's frustration with the lack of transparent credit card information when helping his sister in 2009, NerdWallet (NASDAQ: NRDS) is a digital platform that provides financial guidance to help consumers and small businesses make smarter decisions about credit cards, loans, insurance, and other financial products.
Why Does NRDS Fall Short?
- Negative return on equity shows that some of its growth strategies have backfired
NerdWallet’s stock price of $10.75 implies a valuation ratio of 2.1x forward P/E. If you’re considering NRDS for your portfolio, see our FREE research report to learn more.
Encore Capital Group (ECPG)
Trailing 12-Month Free Cash Flow Margin: 6.6%
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ: ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Are We Hesitant About ECPG?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 49% annually
- 13× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $40.69 per share, Encore Capital Group trades at 6.5x forward P/E. Check out our free in-depth research report to learn more about why ECPG doesn’t pass our bar.
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