3 Cash-Producing Stocks with Questionable Fundamentals

A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to avoid and some better opportunities instead.

Somnigroup (SGI)

Trailing 12-Month Free Cash Flow Margin: 8.5%

Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE:SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products

Why Are We Out on SGI?

1. 15.3% annual revenue growth over the last five years was slower than its consumer discretionary peers
2. Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Somnigroup is trading at $87.07 per share, or 27.6x forward P/E. Read our free research report to see why you should think twice about including SGI in your portfolio.

Polaris (PII)

Trailing 12-Month Free Cash Flow Margin: 7.7%

Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.

Why Should You Sell PII?

1. Products and services fail to spark excitement with consumers, as seen in its flat sales over the last five years
2. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 5 percentage points over the next year
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Polaris’s stock price of $62.23 implies a valuation ratio of 40.4x forward P/E. To fully understand why you should be careful with PII, check out our full research report (it’s free).

Herc (HRI)

Trailing 12-Month Free Cash Flow Margin: 6.8%

Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE:HRI) provides equipment rental and related services to a wide range of industries.

Why Does HRI Give Us Pause?

1. Efficiency has decreased over the last five years as its operating margin fell by 7.3 percentage points
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 22.1% annually while its revenue grew
3. High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $146.22 per share, Herc trades at 21.1x forward P/E. Check out our free in-depth research report to learn more about why HRI doesn’t pass our bar.

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