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 to avoid and some better opportunities instead.
Adobe (ADBE)
Trailing 12-Month Free Cash Flow Margin: 40.8%
Originally named after Adobe Creek that ran behind co-founder John Warnock's house, Adobe (NASDAQ:ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.
Why Do We Think Twice About ADBE?
- Offerings struggled to generate meaningful interest as its average billings growth of 11.9% over the last year did not impress
- Estimated sales growth of 9.3% for the next 12 months implies demand will slow from its two-year trend
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Adobe is trading at $252.15 per share, or 3.5x forward price-to-sales. Check out our free in-depth research report to learn more about why ADBE doesn’t pass our bar.
Masco (MAS)
Trailing 12-Month Free Cash Flow Margin: 14.8%
Headquartered just outside of Detroit, MI, Masco (NYSE:MAS) designs and manufactures home-building products such as glass shower doors, decorative lighting, bathtubs, and faucets.
Why Are We Bearish on MAS?
- 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 1.6%
- Eroding returns on capital suggest its historical profit centers are aging
At $68.54 per share, Masco trades at 15.4x forward P/E. Read our free research report to see why you should think twice about including MAS in your portfolio.
Trimble (TRMB)
Trailing 12-Month Free Cash Flow Margin: 20.4%
Playing a role in the construction of the Paris Grand, Trimble (NASDAQ:TRMB) offers geospatial devices and technology to the agriculture, construction, transportation, and logistics industries.
Why Does TRMB Fall Short?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 6% annually
- Underwhelming 6.1% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Trimble’s stock price of $57.65 implies a valuation ratio of 14.7x forward P/E. If you’re considering TRMB for your portfolio, see our FREE research report to learn more.
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