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.
Scholastic (SCHL)
Trailing 12-Month Free Cash Flow Margin: 27.6%
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ:SCHL) is an international company specializing in children's publishing, education, and media services.
Why Should You Sell SCHL?
- Sales trends were unexciting over the last five years as its 4% annual growth was below the typical consumer discretionary company
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 25.6 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Scholastic is trading at $40.00 per share, or 23.8x forward P/E. To fully understand why you should be careful with SCHL, check out our full research report (it’s free).
Pitney Bowes (PBI)
Trailing 12-Month Free Cash Flow Margin: 24.9%
With a century-long history dating back to 1920 and processing over 15 billion pieces of mail annually, Pitney Bowes (NYSE:PBI) provides shipping, mailing technology, logistics, and financial services to businesses of all sizes.
Why Are We Wary of PBI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 13% annually over the last five years
- Forecasted revenue decline of 1.7% for the upcoming 12 months implies demand will fall even further
Pitney Bowes’s stock price of $16.93 implies a valuation ratio of 10.1x forward P/E. Check out our free in-depth research report to learn more about why PBI doesn’t pass our bar.
Surgery Partners (SGRY)
Trailing 12-Month Free Cash Flow Margin: 5.6%
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Does SGRY Worry Us?
- Underwhelming unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $14.04 per share, Surgery Partners trades at 25.4x forward P/E. Dive into our free research report to see why there are better opportunities than SGRY.
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