A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
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 steer clear of and a few better alternatives.
MDU Resources (MDU)
Trailing 12-Month Free Cash Flow Margin: 10.5%
Founded to provide electricity to towns in Minnesota, MDU Resources (NYSE: MDU) provides products and services in the utilities and construction materials industries.
Why Do We Think MDU Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 15.3% annually over the last five years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.6% for the last five years
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
MDU Resources trades at a stock price of $19.47. Dive into our free research report to see why there are better opportunities than MDU.
Allegion (ALLE)
Trailing 12-Month Free Cash Flow Margin: 17.1%
Allegion plc (NYSE: ALLE) is a provider of security products and solutions that keep people and assets safe and secure in various environments.
Why Does ALLE Give Us Pause?
- Annual revenue growth of 4.9% over the last two years was below our standards for the industrials sector
- 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
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $160.77 per share, Allegion trades at 18.4x forward P/E. If you’re considering ALLE for your portfolio, see our FREE research report to learn more.
Insight Enterprises (NSIT)
Trailing 12-Month Free Cash Flow Margin: 4%
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ: NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Should You Sell NSIT?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.9% annually
Insight Enterprises’s stock price of $79.68 implies a valuation ratio of 7.9x forward P/E. To fully understand why you should be careful with NSIT, check out our full research report (it’s free for active Edge members).
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