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.
Levi's (LEVI)
Trailing 12-Month Free Cash Flow Margin: 8.5%
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE:LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Are We Bearish on LEVI?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Free cash flow margin is forecasted to shrink by 6.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Levi's is trading at $20.11 per share, or 12.7x forward P/E. To fully understand why you should be careful with LEVI, check out our full research report (it’s free).
Covenant Logistics (CVLG)
Trailing 12-Month Free Cash Flow Margin: 2%
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ:CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Are We Out on CVLG?
- 4.5% annual revenue growth over the last two years was slower than its industrials peers
- Earnings per share fell by 16.3% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Covenant Logistics’s stock price of $35.35 implies a valuation ratio of 15.9x forward P/E. If you’re considering CVLG for your portfolio, see our FREE research report to learn more.
Champion Homes (SKY)
Trailing 12-Month Free Cash Flow Margin: 9.9%
Founded in 1951, Champion Homes (NYSE:SKY) is a manufacturer of modular homes and buildings in North America.
Why Are We Cautious About SKY?
- Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 9.1 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $81.78 per share, Champion Homes trades at 22.5x forward P/E. Check out our free in-depth research report to learn more about why SKY doesn’t pass our bar.
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