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. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Wendy's (WEN)
Trailing 12-Month Free Cash Flow Margin: 11%
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ:WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Does WEN Fall Short?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Sales are projected to remain flat over the next 12 months as demand decelerates from its six-year trend
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Wendy’s stock price of $11.33 implies a valuation ratio of 11.1x forward P/E. Read our free research report to see why you should think twice about including WEN in your portfolio.
Alamo (ALG)
Trailing 12-Month Free Cash Flow Margin: 12.5%
Expanding its markets through acquisitions since its founding, Alamo (NSYE:ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.
Why Should You Dump ALG?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Estimated sales growth of 2.8% for the next 12 months is soft and implies weaker demand
- Flat earnings per share over the last two years underperformed the sector average
Alamo is trading at $218.99 per share, or 21.4x forward P/E. To fully understand why you should be careful with ALG, check out our full research report (it’s free).
SiteOne (SITE)
Trailing 12-Month Free Cash Flow Margin: 4.5%
Known for distributing John Deere tractors and LESCO turf care products, SiteOne Landscape Supply (NYSE:SITE) provides landscaping products and services to professionals, including irrigation, lighting, and nursery supplies.
Why Do We Think SITE Will Underperform?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Earnings per share fell by 17.7% 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
At $131.40 per share, SiteOne trades at 33.1x forward P/E. Check out our free in-depth research report to learn more about why SITE doesn’t pass our bar.
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