3 Cash-Producing Stocks We Think Twice About

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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

United Parks & Resorts (PRKS)

Trailing 12-Month Free Cash Flow Margin: 13.2%

Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE:PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.

Why Do We Steer Clear of PRKS?

1. Sluggish trends in its visitors suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Low free cash flow margin of 11.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

United Parks & Resorts’s stock price of $35.08 implies a valuation ratio of 9.2x forward P/E. If you’re considering PRKS for your portfolio, see our FREE research report to learn more.

W.W. Grainger (GWW)

Trailing 12-Month Free Cash Flow Margin: 6.9%

Founded as a supplier of motors, W.W. Grainger (NYSE:GWW) provides maintenance, repair, and operating (MRO) supplies and services to businesses and institutions.

Why Does GWW Fall Short?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Anticipated sales growth of 4.5% for the next year implies demand will be shaky
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.9% annually

At $1,021 per share, W.W. Grainger trades at 24.2x forward P/E. Check out our free in-depth research report to learn more about why GWW doesn’t pass our bar.

Encore Capital Group (ECPG)

Trailing 12-Month Free Cash Flow Margin: 8.5%

Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.

Why Are We Cautious About ECPG?

1. Annual revenue growth of 1.3% over the last five years was below our standards for the financials sector
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 15.9% annually while its revenue grew
3. High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Encore Capital Group is trading at $54.37 per share, or 7.3x forward P/E. Read our free research report to see why you should think twice about including ECPG in your portfolio.

Stocks We Like More

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