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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Floor And Decor (FND)
Trailing 12-Month Free Cash Flow Margin: 4.5%
Operating large, warehouse-style stores, Floor & Decor (NYSE:FND) is a specialty retailer that specializes in hard flooring surfaces for the home such as tiles, hardwood, stone, and laminates.
Why Do We Steer Clear of FND?
- 2.3% annual revenue growth over the last three years was slower than its consumer retail peers
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- ROIC of 7.8% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
Floor And Decor is trading at $44.50 per share, or 21.6x forward P/E. Read our free research report to see why you should think twice about including FND in your portfolio.
Avery Dennison (AVY)
Trailing 12-Month Free Cash Flow Margin: 11.2%
Founded as Kum Kleen Products, Avery Dennison (NYSE:AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
Why Does AVY Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.3%
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 2.9% annually
At $175.56 per share, Avery Dennison trades at 16.8x forward P/E. If you’re considering AVY for your portfolio, see our FREE research report to learn more.
Viavi Solutions (VIAV)
Trailing 12-Month Free Cash Flow Margin: 5.5%
Once known as JDS Uniphase before its 2015 rebranding, Viavi Solutions (NASDAQ:VIAV) provides testing, monitoring and assurance solutions for telecommunications, cloud, enterprise, military, and other critical networks and infrastructure.
Why Do We Think Twice About VIAV?
- Sales trends were unexciting over the last five years as its 4.8% annual growth was below the typical industrials company
- Efficiency has decreased over the last five years as its operating margin fell by 7.4 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Viavi Solutions’s stock price of $35.19 implies a valuation ratio of 20.3x forward P/E. Dive into our free research report to see why there are better opportunities than VIAV.
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