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 steer clear of and a few better alternatives.
Williams-Sonoma (WSM)
Trailing 12-Month Free Cash Flow Margin: 14%
Started in 1956 as a store specializing in French cookware, Williams-Sonoma (NYSE: WSM) is a specialty retailer of higher-end kitchenware, home goods, and furniture.
Why Are We Hesitant About WSM?
- Ongoing store closures and lackluster same-store sales indicate sluggish demand and a focus on consolidation
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Earnings growth underperformed the sector average over the last three years as its EPS grew by just 3.3% annually
Williams-Sonoma’s stock price of $191.07 implies a valuation ratio of 21.5x forward P/E. If you’re considering WSM for your portfolio, see our FREE research report to learn more.
Gray Television (GTN)
Trailing 12-Month Free Cash Flow Margin: 6.8%
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Do We Avoid GTN?
- Muted 9.1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $4.90 per share, Gray Television trades at 7.1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why GTN doesn’t pass our bar.
Plexus (PLXS)
Trailing 12-Month Free Cash Flow Margin: 3.8%
With over 20,000 team members across 26 global facilities, Plexus (NASDAQ: PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.
Why Does PLXS Give Us Pause?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.1% annually over the last two years
- Low free cash flow margin of 2.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital suggest its historical profit centers are aging
Plexus is trading at $153.46 per share, or 20.8x forward P/E. Dive into our free research report to see why there are better opportunities than PLXS.
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