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. Keeping that in mind, 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:
Estée Lauder (EL)
Trailing 12-Month Free Cash Flow Margin: 7.8%
Named after its founder, who was an entrepreneurial woman from New York with a passion for skincare, Estée Lauder (NYSE:EL) is a one-stop beauty shop with products in skincare, fragrance, makeup, sun protection, and men’s grooming.
Why Does EL Give Us Pause?
- 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
- Poor expense management has led to an operating margin of 0.3% that is below the industry average
- Issuance of new shares over the last three years caused its earnings per share to fall by 28% annually, even worse than its revenue declines
Estée Lauder’s stock price of $104.45 implies a valuation ratio of 38.2x forward P/E. Check out our free in-depth research report to learn more about why EL doesn’t pass our bar.
W.W. Grainger (GWW)
Trailing 12-Month Free Cash Flow Margin: 7.4%
Founded as a supplier of motors, W.W. Grainger (NYSE:GWW) provides maintenance, repair, and operating (MRO) supplies and services to businesses and institutions.
Why Is GWW Not Exciting?
- 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
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.6%
- Earnings per share have dipped by 1.1% annually over the past two years, which is concerning because stock prices follow EPS over the long term
W.W. Grainger is trading at $1,202 per share, or 27.2x forward P/E. Dive into our free research report to see why there are better opportunities than GWW.
One Stock to Watch:
Yum! Brands (YUM)
Trailing 12-Month Free Cash Flow Margin: 20%
Spun off as an independent company from PepsiCo, Yum! Brands (NYSE:YUM) is a multinational corporation that owns KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill.
Why Do We Like YUM?
- Bold push to open new restaurants demonstrates an ambitious strategy to establish itself in underpenetrated territories
- Disciplined cost controls and effective management resulted in a strong two-year operating margin of 31.6%
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $158.84 per share, Yum! Brands trades at 23.9x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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