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.
Live Nation (LYV)
Trailing 12-Month Free Cash Flow Margin: 6.5%
Owner of Ticketmaster and operator of music festival EDC, Live Nation (NYSE: LYV) is a company specializing in live event promotion, venue management, and ticketing services for concerts and shows.
Why Do We Pass on LYV?
- Annual sales growth of 4.6% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.4 percentage points
Live Nation’s stock price of $177.12 implies a valuation ratio of 134.9x forward P/E. If you’re considering LYV for your portfolio, see our FREE research report to learn more.
Array (ARRY)
Trailing 12-Month Free Cash Flow Margin: 5.4%
Going public in October 2020, Array (NASDAQ: ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.
Why Is ARRY Risky?
- Sales tumbled by 5.6% annually over the last two years, showing market trends are working against it during this cycle
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $5.59 per share, Array trades at 7.9x forward P/E. Dive into our free research report to see why there are better opportunities than ARRY.
Fortune Brands (FBIN)
Trailing 12-Month Free Cash Flow Margin: 7.7%
Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE: FBIN) makes plumbing, security, and outdoor living products.
Why Are We Out on FBIN?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Forecasted revenue decline of 1.2% for the upcoming 12 months implies demand will fall even further
- Earnings per share have dipped by 6% annually over the past five years, which is concerning because stock prices follow EPS over the long term
Fortune Brands is trading at $49.82 per share, or 15.3x forward P/E. Read our free research report to see why you should think twice about including FBIN in your portfolio.
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