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. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Quanex (NX)
Trailing 12-Month Free Cash Flow Margin: 2.3%
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Is NX Not Exciting?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 4.6 percentage points
- Earnings per share fell by 6.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.7 percentage points
At $18.36 per share, Quanex trades at 7.2x forward P/E. If you’re considering NX for your portfolio, see our FREE research report to learn more.
Rogers (ROG)
Trailing 12-Month Free Cash Flow Margin: 6.7%
With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE: ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.
Why Is ROG Risky?
- Annual sales declines of 1.2% for the past five years show its products and services struggled to connect with the market during this cycle
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 14.4% annually, worse than its revenue
- Free cash flow margin dropped by 12.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Rogers’s stock price of $68.55 implies a valuation ratio of 26x forward P/E. Dive into our free research report to see why there are better opportunities than ROG.
Regeneron (REGN)
Trailing 12-Month Free Cash Flow Margin: 22%
Founded by scientists who wanted to build a company where science could thrive, Regeneron Pharmaceuticals (NASDAQ: REGN) develops and commercializes medicines for serious diseases, with key products treating eye conditions, allergic diseases, cancer, and other disorders.
Why Are We Wary of REGN?
- Annual sales growth of 6.7% over the last two years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 12.3 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Regeneron is trading at $615 per share, or 15.4x forward P/E. Check out our free in-depth research report to learn more about why REGN doesn’t pass our bar.
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