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. Keeping that in mind, here are three cash-producing companies that don’t make the cut and some better opportunities instead.
Analog Devices (ADI)
Trailing 12-Month Free Cash Flow Margin: 33.5%
Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ:ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.
Why Does ADI Fall Short?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.7% annually over the last two years
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 7.3 percentage points
- Underwhelming 6.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Analog Devices is trading at $241.50 per share, or 30.7x forward P/E. Read our free research report to see why you should think twice about including ADI in your portfolio.
Tapestry (TPR)
Trailing 12-Month Free Cash Flow Margin: 13%
Originally founded as Coach, Tapestry (NYSE:TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Are We Cautious About TPR?
- Lackluster 1.6% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3%
Tapestry’s stock price of $102.16 implies a valuation ratio of 19.9x forward P/E. To fully understand why you should be careful with TPR, check out our full research report (it’s free).
Rockwell Automation (ROK)
Trailing 12-Month Free Cash Flow Margin: 13.4%
One of the first companies to address industrial automation, Rockwell Automation (NYSE:ROK) sells products that help customers extract more efficiency from their machinery.
Why Do We Pass on ROK?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Sales were less profitable over the last two years as its earnings per share fell by 8% annually, worse than its revenue declines
- Eroding returns on capital suggest its historical profit centers are aging
At $356.49 per share, Rockwell Automation trades at 35.6x forward P/E. Check out our free in-depth research report to learn more about why ROK doesn’t pass our bar.
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