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 that don’t make the cut and some better opportunities instead.
CarGurus (CARG)
Trailing 12-Month Free Cash Flow Margin: 22.6%
Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ: CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.
Why Is CARG Not Exciting?
- Paying Dealers have stagnated over the last two years, indicating its platform may be struggling to differentiate itself from competitors
- Estimated sales growth of 6.1% for the next 12 months is soft and implies weaker demand
- Earnings growth over the last three years fell short of the peer group average as its EPS only increased by 5.8% annually
At $31.75 per share, CarGurus trades at 11.8x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than CARG.
Vestis (VSTS)
Trailing 12-Month Free Cash Flow Margin: 1.8%
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE: VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Should You Sell VSTS?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
- Free cash flow margin dropped by 6 percentage points over the last four years, implying the company became more capital intensive as competition picked up
Vestis’s stock price of $5.82 implies a valuation ratio of 7.3x forward P/E. Check out our free in-depth research report to learn more about why VSTS doesn’t pass our bar.
West Pharmaceutical Services (WST)
Trailing 12-Month Free Cash Flow Margin: 10.6%
Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE: WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.
Why Do We Think Twice About WST?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Costs have risen faster than its revenue over the last two years, causing its adjusted operating margin to decline by 5.7 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
West Pharmaceutical Services is trading at $217.95 per share, or 34.1x forward P/E. If you’re considering WST for your portfolio, see our FREE research report to learn more.
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