A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies that don’t make the cut and some better opportunities instead.
Bright Horizons (BFAM)
Trailing 12-Month Free Cash Flow Margin: 9%
Founded in 1986, Bright Horizons (NYSE:BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Do We Pass on BFAM?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 1.1% annually while its revenue grew
- Underwhelming 4.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Bright Horizons is trading at $120.64 per share, or 30.3x forward price-to-earnings. If you’re considering BFAM for your portfolio, see our FREE research report to learn more.
Strategic Education (STRA)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ:STRA) is a career-focused higher education provider.
Why Should You Dump STRA?
- Performance surrounding its domestic students has lagged its peers
- Earnings per share fell by 6.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Underwhelming 3.7% return on capital reflects management’s difficulties in finding profitable growth opportunities
Strategic Education’s stock price of $80.93 implies a valuation ratio of 14.2x forward price-to-earnings. Read our free research report to see why you should think twice about including STRA in your portfolio.
Arlo Technologies (ARLO)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Originally spun off from networking equipment maker Netgear in 2018, Arlo Technologies (NYSE:ARLO) provides cloud-based smart security devices and subscription services that help consumers and businesses monitor and protect their homes, properties, and loved ones.
Why Are We Cautious About ARLO?
- 2.1% annual revenue growth over the last two years was slower than its business services peers
- Modest revenue base of $510.9 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Cash burn makes us question whether it can achieve sustainable long-term growth
At $9.98 per share, Arlo Technologies trades at 18.7x forward price-to-earnings. Check out our free in-depth research report to learn more about why ARLO doesn’t pass our bar.
Stocks We Like More
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