3 Cash-Producing Stocks That Concern Us

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.

BeautyHealth (SKIN)

Trailing 12-Month Free Cash Flow Margin: 9.3%

Operating in the emerging beauty health category, the appropriately named BeautyHealth (NASDAQ:SKIN) is a skincare company best known for its Hydrafacial product that cleanses and hydrates skin.

Why Is SKIN Risky?

1. Lackluster 3.8% annual revenue growth over the last three years indicates the company is losing ground to competitors
2. Suboptimal cost structure is highlighted by its history of operating margin losses
3. 10× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

BeautyHealth’s stock price of $1.61 implies a valuation ratio of 12.5x forward EV-to-EBITDA. To fully understand why you should be careful with SKIN, check out our full research report (it’s free).

DistributionNOW (DNOW)

Trailing 12-Month Free Cash Flow Margin: 7.8%

Spun off from National Oilwell Varco, DistributionNOW (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.

Why Do We Pass on DNOW?

1. Annual sales declines of 2.8% for the past five years show its products and services struggled to connect with the market during this cycle
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Free cash flow margin dropped by 4.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up

DistributionNOW is trading at $14.91 per share, or 10.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including DNOW in your portfolio.

H&E Equipment Services (HEES)

Trailing 12-Month Free Cash Flow Margin: 14.6%

Founded after recognizing a growth trend along the Mississippi River and opportunities developing in the earthmoving and construction equipment business, H&E (NASDAQ:HEES) offers machinery for companies to purchase or rent.

Why Are We Wary of HEES?

1. 2.1% annual revenue growth over the last five years was slower than its industrials peers
2. Earnings per share fell by 1.3% annually over the last five years while its revenue grew, partly because it diluted shareholders
3. Poor free cash flow margin of 0.5% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

At $94.50 per share, H&E Equipment Services trades at 6.3x forward EV-to-EBITDA. If you’re considering HEES for your portfolio, see our FREE research report to learn more.

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