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.
Textron (TXT)
Trailing 12-Month Free Cash Flow Margin: 4%
Listed on the NYSE in 1947, Textron (NYSE:TXT) provides products and services in the aerospace, defense, industrial, and finance sectors.
Why Are We Cautious About TXT?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Anticipated sales growth of 6.7% for the next year implies demand will be shaky
- Free cash flow margin dropped by 5.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Textron is trading at $81.37 per share, or 12.9x forward P/E. If you’re considering TXT for your portfolio, see our FREE research report to learn more.
BWX (BWXT)
Trailing 12-Month Free Cash Flow Margin: 9.7%
Contributing components and materials to the famous Manhattan Project in the 1940s, BWX (NYSE:BWXT) is a manufacturer and service provider of nuclear components and fuel for government and commercial industries.
Why Are We Hesitant About BWXT?
- Annual revenue growth of 6.6% over the last five years was below our standards for the industrials sector
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 2.4 percentage points
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 3% annually
BWX’s stock price of $143.61 implies a valuation ratio of 40x forward P/E. Read our free research report to see why you should think twice about including BWXT in your portfolio.
Incyte (INCY)
Trailing 12-Month Free Cash Flow Margin: 7.6%
Founded in 1991 and evolving from a genomics research firm to a commercial-stage drug developer, Incyte (NASDAQ:INCY) is a biopharmaceutical company that discovers, develops, and commercializes proprietary therapeutics for cancer and inflammatory diseases.
Why Do We Think Twice About INCY?
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 15.2 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 13.5 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $67 per share, Incyte trades at 11.4x forward P/E. Dive into our free research report to see why there are better opportunities than INCY.
Stocks We Like More
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