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. That said, here is one cash-producing company that reinvests wisely to drive long-term success and two that may face some trouble.
Two Stocks to Sell:
Chemed (CHE)
Trailing 12-Month Free Cash Flow Margin: 12.5%
With a unique business model combining end-of-life care and household services, Chemed (NYSE: CHE) operates two distinct businesses: VITAS, which provides hospice care for terminally ill patients, and Roto-Rooter, which offers plumbing and water restoration services.
Why Are We Wary of CHE?
- Sales trends were unexciting over the last five years as its 4.1% annual growth was below the typical healthcare company
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3.9 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Chemed’s stock price of $536.56 implies a valuation ratio of 21.2x forward P/E. Read our free research report to see why you should think twice about including CHE in your portfolio.
Fidelity National Financial (FNF)
Trailing 12-Month Free Cash Flow Margin: 36.2%
Issuing more title insurance policies than any other company in the United States, Fidelity National Financial (NYSE: FNF) provides title insurance and escrow services for real estate transactions while also offering annuities and life insurance through its F&G subsidiary.
Why Do We Pass on FNF?
- Net premiums earned contracted by 3.8% annually over the last five years, showing unfavorable market dynamics this cycle
- Earnings per share fell by 5.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 2.1% annually over the last five years
At $48.35 per share, Fidelity National Financial trades at 1.4x forward P/B. Dive into our free research report to see why there are better opportunities than FNF.
One Stock to Buy:
MercadoLibre (MELI)
Trailing 12-Month Free Cash Flow Margin: 35.3%
Originally started as an online auction platform, MercadoLibre (NASDAQ: MELI) is a one-stop e-commerce marketplace and fintech platform in Latin America.
Why Is MELI a Good Business?
- 63.1% annual increases in its average revenue per user over the last two years show its platform is resonating with power users
- Earnings per share grew by 35% annually over the last three years and trumped its peers
- Robust free cash flow margin of 33.4% gives it many options for capital deployment, and its rising cash conversion increases its margin of safety
MercadoLibre is trading at $1,935 per share, or 18.9x forward EV/EBITDA. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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