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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
J. M. Smucker (SJM)
Trailing 12-Month Free Cash Flow Margin: 7.7%
Best known for its fruit jams and spreads, J.M Smucker (NYSE: SJM) is a packaged foods company whose products span from peanut butter and coffee to pet food.
Why Should You Dump SJM?
- 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
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 27.1 percentage points
- ROIC of 2.2% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $105.60 per share, J. M. Smucker trades at 11.1x forward P/E. To fully understand why you should be careful with SJM, check out our full research report (it’s free for active Edge members).
Mohawk Industries (MHK)
Trailing 12-Month Free Cash Flow Margin: 5.5%
Established in 1878, Mohawk Industries (NYSE: MHK) is a leading producer of floor-covering products for both residential and commercial applications.
Why Is MHK Risky?
- 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
- Estimated sales growth of 3% for the next 12 months is soft and implies weaker demand
- Underwhelming 3.7% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Mohawk Industries’s stock price of $107.56 implies a valuation ratio of 11x forward P/E. Read our free research report to see why you should think twice about including MHK in your portfolio.
Champion Homes (SKY)
Trailing 12-Month Free Cash Flow Margin: 7.6%
Founded in 1951, Champion Homes (NYSE: SKY) is a manufacturer of modular homes and buildings in North America.
Why Does SKY Worry Us?
- Estimated sales growth of 2.2% for the next 12 months implies demand will slow from its two-year trend
- Earnings per share fell by 3.2% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
Champion Homes is trading at $79.61 per share, or 20.7x forward P/E. If you’re considering SKY for your portfolio, see our FREE research report to learn more.
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