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.
RE/MAX (RMAX)
Trailing 12-Month Free Cash Flow Margin: 11.7%
Short for Real Estate Maximums, RE/MAX (NYSE:RMAX) operates a real estate franchise network spanning over 100 countries and territories.
Why Should You Sell RMAX?
- Sluggish trends in its agents suggest customers aren’t adopting its solutions as quickly as the company hoped
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.1% annually while its revenue grew
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 8 percentage points over the next year
RE/MAX’s stock price of $8.37 implies a valuation ratio of 6.6x forward P/E. To fully understand why you should be careful with RMAX, check out our full research report (it’s free for active Edge members).
Service International (SCI)
Trailing 12-Month Free Cash Flow Margin: 14.4%
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Why Do We Avoid SCI?
- Number of funeral services performed has disappointed over the past two years, indicating weak demand for its offerings
- Poor free cash flow margin of 14.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Service International is trading at $79.28 per share, or 18.7x forward P/E. Dive into our free research report to see why there are better opportunities than SCI.
Hologic (HOLX)
Trailing 12-Month Free Cash Flow Margin: 18.9%
As a pioneer in 3D mammography technology that has revolutionized breast cancer detection, Hologic (NASDAQ:HOLX) develops and manufactures diagnostic products, medical imaging systems, and surgical devices focused primarily on women's health and wellness.
Why Are We Wary of HOLX?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 20.6 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $74.96 per share, Hologic trades at 16.4x forward P/E. Check out our free in-depth research report to learn more about why HOLX doesn’t pass our bar.
Stocks We Like More
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