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.
Fastenal (FAST)
Trailing 12-Month Free Cash Flow Margin: 11.3%
Founded in 1967, Fastenal (NASDAQ:FAST) provides industrial and construction supplies, including fasteners, tools, safety products, and many other product categories to businesses globally.
Why Are We Cautious About FAST?
- 3.6% annual revenue growth over the last two years was slower than its industrials peers
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.8% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.8 percentage points
Fastenal is trading at $47.54 per share, or 44.2x forward P/E. If you’re considering FAST for your portfolio, see our FREE research report to learn more.
AECOM (ACM)
Trailing 12-Month Free Cash Flow Margin: 5.1%
Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE:ACM) provides various infrastructure consulting services.
Why Does ACM Worry Us?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 2% declines over the past two years
- Gross margin of 6.6% reflects its high production costs
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
At $129 per share, AECOM trades at 24.1x forward P/E. To fully understand why you should be careful with ACM, check out our full research report (it’s free).
Albany (AIN)
Trailing 12-Month Free Cash Flow Margin: 8.2%
Founded in 1895, Albany (NYSE:AIN) is a global textiles and materials processing company, specializing in machine clothing for paper mills and engineered composite structures for aerospace and other industries.
Why Should You Dump AIN?
- Sales trends were unexciting over the last five years as its 3.7% annual growth was below the typical industrials company
- Earnings per share fell by 7.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- 8.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Albany’s stock price of $54.54 implies a valuation ratio of 12.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including AIN in your portfolio.
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