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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Home Depot (HD)
Trailing 12-Month Free Cash Flow Margin: 8.6%
Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE: HD) is a home improvement retailer that sells everything from tools to building materials to appliances.
Why Does HD Worry Us?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Gross margin of 33.5% is below its competitors, leaving less money for marketing and promotions
- 2.4 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
Home Depot is trading at $392.20 per share, or 25x forward P/E. If you’re considering HD for your portfolio, see our FREE research report to learn more.
VF Corp (VFC)
Trailing 12-Month Free Cash Flow Margin: 2.1%
Owner of The North Face, Vans, and Supreme, VF Corp (NYSE: VFC) is a clothing conglomerate specializing in branded lifestyle apparel, footwear, and accessories.
Why Do We Think VFC Will Underperform?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $14.20 per share, VF Corp trades at 18.2x forward P/E. Read our free research report to see why you should think twice about including VFC in your portfolio.
ICF International (ICFI)
Trailing 12-Month Free Cash Flow Margin: 6%
Operating at the intersection of policy, technology, and implementation for over five decades, ICF International (NASDAQ: ICFI) provides professional consulting services and technology solutions to government agencies and commercial clients across energy, health, environment, and security sectors.
Why Are We Out on ICFI?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 1.2% declines over the past two years
- Forecasted revenue decline of 2.3% for the upcoming 12 months implies demand will fall off a cliff
- ROIC of 8% reflects management’s challenges in identifying attractive investment opportunities
ICF International’s stock price of $88.17 implies a valuation ratio of 12.7x forward P/E. Check out our free in-depth research report to learn more about why ICFI doesn’t pass our bar.
Stocks We Like More
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