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. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Marriott (MAR)
Trailing 12-Month Free Cash Flow Margin: 10%
Founded by J. Willard Marriott in 1927, Marriott International (NASDAQ: MAR) is a global hospitality company with a portfolio of over 7,000 properties and 30 brands, spanning 130+ countries and territories.
Why Do We Steer Clear of MAR?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Subpar operating margin of 15.4% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Free cash flow margin is expected to increase by 1.1 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
Marriott’s stock price of $324.29 implies a valuation ratio of 28.2x forward P/E. Read our free research report to see why you should think twice about including MAR in your portfolio.
Jabil (JBL)
Trailing 12-Month Free Cash Flow Margin: 4.4%
With manufacturing facilities spanning the globe from China to Mexico to the United States, Jabil (NYSE: JBL) provides electronics design, manufacturing, and supply chain solutions to companies across various industries, from healthcare to automotive to cloud computing.
Why Does JBL Worry Us?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.6% annually over the last two years
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 9.2% annually
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Jabil is trading at $252.65 per share, or 21x forward P/E. To fully understand why you should be careful with JBL, check out our full research report (it’s free).
Dentsply Sirona (XRAY)
Trailing 12-Month Free Cash Flow Margin: 2.8%
With roots dating back to 1877 when it introduced the first dental electric drill, Dentsply Sirona (NASDAQ: XRAY) manufactures and sells professional dental equipment, technologies, and consumable products used by dentists and specialists worldwide.
Why Do We Pass on XRAY?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Negative returns on capital show that some of its growth strategies have backfired, and its shrinking returns suggest its past profit sources are losing steam
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $12.60 per share, Dentsply Sirona trades at 8.9x forward P/E. Dive into our free research report to see why there are better opportunities than XRAY.
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