A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
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.
Cognex (CGNX)
Trailing 12-Month Free Cash Flow Margin: 24.6%
Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ:CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.
Why Does CGNX Worry Us?
- Muted 2.1% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Earnings per share have contracted by 2.5% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Diminishing returns on capital suggest its earlier profit pools are drying up
Cognex’s stock price of $67.65 implies a valuation ratio of 42.2x forward P/E. If you’re considering CGNX for your portfolio, see our FREE research report to learn more.
Archer-Daniels-Midland (ADM)
Trailing 12-Month Free Cash Flow Margin: 2%
Transforming crops from the world's most productive agricultural regions into everyday essentials, Archer-Daniels-Midland (NYSE:ADM) processes and transports agricultural commodities like grains and oilseeds while manufacturing ingredients for food, beverages, feed, and industrial applications.
Why Do We Pass on ADM?
- Annual sales declines of 6.3% for the past three years show its products struggled to connect with the market
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 6.6%
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 17.6% annually, worse than its revenue
At $77.90 per share, Archer-Daniels-Midland trades at 13.1x forward P/E. To fully understand why you should be careful with ADM, check out our full research report (it’s free).
Nabors Industries (NBR)
Trailing 12-Month Free Cash Flow Margin: 1.2%
Operating one of the largest land-based drilling rig fleets in the world with over 285 rigs across more than 15 countries, Nabors Industries (NYSE:NBR) operates drilling rigs and provides related services to help oil and gas companies drill wells on land and offshore platforms.
Why Is NBR Not Exciting?
- Gross margin of 39.1% reflects its high production costs and unfavorable asset base
- Low free cash flow margin of 1.9% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Nabors Industries is trading at $83.06 per share, or 44.2x forward P/E. Read our free research report to see why you should think twice about including NBR in your portfolio.
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