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.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Bandwidth (BAND)
Trailing 12-Month Free Cash Flow Margin: 6.6%
Started in 1999 by David Morken who was later joined by Henry Kaestner as co-founder in 2001, Bandwidth (NASDAQ: BAND) provides thousands of customers with a software platform that uses its own global network to provide phone numbers, voice, and text connectivity.
Why Is BAND Risky?
- Sales trends were unexciting over the last three years as its 13.9% annual growth was below the typical software company
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its three-year trend
- Gross margin of 38% is way below its competitors, leaving less money to invest in areas like marketing and R&D
Bandwidth is trading at $13.84 per share, or 0.5x forward price-to-sales. Check out our free in-depth research report to learn more about why BAND doesn’t pass our bar.
Steven Madden (SHOO)
Trailing 12-Month Free Cash Flow Margin: 7.1%
As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ: SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.
Why Does SHOO Worry Us?
- Lackluster 5.7% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Earnings per share lagged its peers over the last five years as they only grew by 9.2% annually
- Free cash flow margin is forecasted to shrink by 2.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Steven Madden’s stock price of $25.92 implies a valuation ratio of 12.9x forward P/E. Read our free research report to see why you should think twice about including SHOO in your portfolio.
Heartland Express (HTLD)
Trailing 12-Month Free Cash Flow Margin: 7.9%
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Should You Dump HTLD?
- Sales tumbled by 6.8% annually over the last two years, showing market trends are working against its favor during this cycle
- 10.8 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
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $8.73 per share, Heartland Express trades at 4.5x forward EV-to-EBITDA. If you’re considering HTLD for your portfolio, see our FREE research report to learn more.
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