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 are three cash-producing companies to avoid and some better opportunities instead.
WD-40 (WDFC)
Trailing 12-Month Free Cash Flow Margin: 10.8%
Short for “Water Displacement perfected on the 40th try”, WD-40 (NASDAQ: WDFC) is a renowned American consumer goods company known for its iconic and versatile spray, WD-40 Multi-Use Product.
Why Does WDFC Give Us Pause?
- Muted 5.7% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Revenue base of $610.6 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin shrank by 10 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
At $228.01 per share, WD-40 trades at 39.7x forward P/E. Check out our free in-depth research report to learn more about why WDFC doesn’t pass our bar.
PACCAR (PCAR)
Trailing 12-Month Free Cash Flow Margin: 10.8%
Founded more than a century ago, PACCAR (NASDAQ: PCAR) designs and manufactures commercial trucks of various weights and sizes for the commercial trucking industry.
Why Does PCAR Worry Us?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Sales are projected to tank by 8.7% over the next 12 months as demand evaporates
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.7% annually
PACCAR is trading at $95 per share, or 16x forward P/E. Read our free research report to see why you should think twice about including PCAR in your portfolio.
Waste Management (WM)
Trailing 12-Month Free Cash Flow Margin: 9.1%
Headquartered in Houston, Waste Management (NYSE: WM) is a provider of comprehensive waste management services in North America.
Why Is WM Not Exciting?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.2% for the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6 percentage points
Waste Management’s stock price of $229.49 implies a valuation ratio of 29.6x forward P/E. Dive into our free research report to see why there are better opportunities than WM.
Stocks We Like More
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