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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. 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:
Starbucks (SBUX)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Started by three friends in Seattle’s historic Pike Place Market, Starbucks (NASDAQ:SBUX) is a globally-renowned coffeehouse chain that offers a wide selection of high-quality coffee, beverages, and food items.
Why Are We Wary of SBUX?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Estimated sales decline of 1.6% for the next 12 months implies a challenging demand environment
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 3 percentage points
At $95.03 per share, Starbucks trades at 32.5x forward P/E. Read our free research report to see why you should think twice about including SBUX in your portfolio.
Generac (GNRC)
Trailing 12-Month Free Cash Flow Margin: 8.5%
With its name deriving from a combination of “generating” and “AC”, Generac (NYSE:GNRC) offers generators and other power products for residential, industrial, and commercial use.
Why Are We Hesitant About GNRC?
- 5.1% annual revenue growth over the last two years was slower than its industrials peers
- Efficiency has decreased over the last five years as its operating margin fell by 6.7 percentage points
- Earnings per share have dipped by 1.9% annually over the past five years, which is concerning because stock prices follow EPS over the long term
Generac is trading at $205.91 per share, or 20.3x forward P/E. Check out our free in-depth research report to learn more about why GNRC doesn’t pass our bar.
One Stock to Watch:
Halozyme Therapeutics (HALO)
Trailing 12-Month Free Cash Flow Margin: 48.5%
Known for transforming hours-long intravenous infusions into minutes-long subcutaneous injections, Halozyme Therapeutics (NASDAQ:HALO) develops and licenses its proprietary ENHANZE technology that enables subcutaneous delivery of injectable drugs that would otherwise require intravenous administration.
Why Are We Positive on HALO?
- Impressive 38% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Earnings per share grew by 24.7% annually over the last five years and trumped its peers
- HALO is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Halozyme Therapeutics’s stock price of $112.08 implies a valuation ratio of 11.5x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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