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 is one cash-producing company that reinvests wisely to drive long-term success and two that may face some trouble.
Two Stocks to Sell:
TPI Composites (TPIC)
Trailing 12-Month Free Cash Flow Margin: 2.3%
Founded in 1968, TPI Composites (NASDAQ:TPIC) manufactures composite wind turbine blades and provides related precision molding and assembly systems.
Why Do We Avoid TPIC?
- Billings have dropped by 11.5% on average over the past two years, suggesting it might have to lower prices to accelerate growth
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
TPI Composites is trading at $0.94 per share, or 0.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TPIC doesn’t pass our bar.
IAC (IAC)
Trailing 12-Month Free Cash Flow Margin: 9.6%
Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ:IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.
Why Do We Pass on IAC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last five years
- Earnings per share have dipped by 51% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Negative returns on capital show management lost money while trying to expand the business
IAC’s stock price of $39.49 implies a valuation ratio of 31.7x forward P/E. Dive into our free research report to see why there are better opportunities than IAC.
One Stock to Watch:
Adobe (ADBE)
Trailing 12-Month Free Cash Flow Margin: 41.8%
One of the most well-known Silicon Valley software companies around, Adobe (NASDAQ:ADBE) is a leading provider of software as service in the digital design and document management space.
Why Does ADBE Stand Out?
- Software is difficult to replicate at scale and results in a best-in-class gross margin of 89.2%
- Excellent operating margin of 36.4% highlights the efficiency of its business model, and its rise over the last year was fueled by some leverage on its fixed costs
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $378.10 per share, Adobe trades at 6.6x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.
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