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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Medifast (MED)
Trailing 12-Month Free Cash Flow Margin: 1.3%
Known for its Optavia program that combines portion-controlled meal replacements with coaching, Medifast (NYSE:MED) has a broad product portfolio of bars, snacks, drinks, and desserts for those looking to lose weight or consume healthier foods.
Why Do We Pass on MED?
- Products aren’t resonating with the market as its revenue declined by 38.7% annually over the last three years
- Operating margin declined by 9.5 percentage points over the last year as its sales cratered
- Earnings per share have contracted by 29.9% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Medifast’s stock price of $12.14 implies a valuation ratio of 0.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MED.
Viatris (VTRS)
Trailing 12-Month Free Cash Flow Margin: 13.3%
Created through the 2020 merger of Mylan and Pfizer's Upjohn division, Viatris (NASDAQ:VTRS) is a healthcare company that develops, manufactures, and distributes branded and generic medicines across more than 165 countries worldwide.
Why Are We Out on VTRS?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.7% annually over the last two years
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 8% annually, worse than its revenue
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
At $16.63 per share, Viatris trades at 6.6x forward P/E. If you’re considering VTRS for your portfolio, see our FREE research report to learn more.
Insperity (NSP)
Trailing 12-Month Free Cash Flow Margin: 2.8%
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE:NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Does NSP Worry Us?
- Sales trends were unexciting over the last two years as its 2.5% annual growth was below the typical business services company
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.6 percentage points
- Earnings per share fell by 27.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Insperity is trading at $53.54 per share, or 22.3x forward P/E. Read our free research report to see why you should think twice about including NSP in your portfolio.
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