While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Semtech (SMTC)
Trailing 12-Month Free Cash Flow Margin: 13.9%
A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.
Why Do We Think SMTC Will Underperform?
- Mounting operating losses demonstrate the tradeoff between growth and profitability
- Low free cash flow margin of 9.3% declined over the last five years as its investments ramped, giving it little breathing room
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
At $86.00 per share, Semtech trades at 43.7x forward P/E. If you’re considering SMTC for your portfolio, see our FREE research report to learn more.
RH (RH)
Trailing 12-Month Free Cash Flow Margin: 3.8%
Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Does RH Fall Short?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Earnings per share have dipped by 38.3% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
RH is trading at $204.81 per share, or 21.2x forward P/E. Check out our free in-depth research report to learn more about why RH doesn’t pass our bar.
Corcept (CORT)
Trailing 12-Month Free Cash Flow Margin: 22%
Focusing on the powerful stress hormone that affects everything from metabolism to immune function, Corcept Therapeutics (NASDAQ: CORT) develops and markets medications that modulate cortisol to treat endocrine disorders, cancer, and neurological diseases.
Why Do We Think Twice About CORT?
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 24.7 percentage points
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.5% annually
- Free cash flow margin dropped by 21.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Corcept’s stock price of $39.97 implies a valuation ratio of 90.2x forward P/E. Read our free research report to see why you should think twice about including CORT in your portfolio.
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