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 that don’t make the cut and some better opportunities instead.
Kellanova (K)
Trailing 12-Month Free Cash Flow Margin: 4.7%
With Corn Flakes as its first and most iconic product, Kellanova (NYSE:K) is a packaged foods company that is dominant in the cereal and snack categories.
Why Are We Wary of K?
- Flat unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Anticipated sales growth of 2.4% for the next year implies demand will be shaky
- Performance over the past three years was negatively impacted by new share issuances as its earnings per share fell by 3.5% annually while its revenue was flat
Kellanova’s stock price of $83.04 implies a valuation ratio of 22.4x forward P/E. Read our free research report to see why you should think twice about including K in your portfolio.
Pfizer (PFE)
Trailing 12-Month Free Cash Flow Margin: 16.5%
With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE:PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.
Why Do We Think Twice About PFE?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- 26.5 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 suggest its earlier profit pools are drying up
Pfizer is trading at $24.57 per share, or 7.9x forward P/E. If you’re considering PFE for your portfolio, see our FREE research report to learn more.
FactSet (FDS)
Trailing 12-Month Free Cash Flow Margin: 26.6%
Founded in 1978 when financial data was still primarily delivered through paper reports, FactSet (NYSE:FDS) provides financial data, analytics, and technology solutions that investment professionals use to research, analyze, and manage their portfolios.
Why Does FDS Worry Us?
- 5.5% annual revenue growth over the last two years was slower than its financials peers
- Earnings per share lagged its peers over the last two years as they only grew by 8.1% annually
At $264.40 per share, FactSet trades at 15.1x forward P/E. To fully understand why you should be careful with FDS, check out our full research report (it’s free for active Edge members).
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