3 Cash-Producing Stocks Facing Headwinds

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

Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Rapid7 (RPD)

Trailing 12-Month Free Cash Flow Margin: 17.8%

Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ:RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.

Why Do We Pass on RPD?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 4.6% underwhelmed
2. Estimated sales growth of 2% for the next 12 months implies demand will slow from its three-year trend
3. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.4 percentage points

Rapid7’s stock price of $24.50 implies a valuation ratio of 1.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than RPD.

Electronic Arts (EA)

Trailing 12-Month Free Cash Flow Margin: 24.9%

Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ:EA) is one of the world’s largest video game publishers.

Why Does EA Give Us Pause?

1. Sales trends were unexciting over the last three years as its 2.1% annual growth was below the typical consumer internet company
2. Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
3. Costs have risen faster than its revenue over the last few years, causing its EBITDA margin to decline by 8.1 percentage points

Electronic Arts is trading at $157 per share, or 15.6x forward EV/EBITDA. To fully understand why you should be careful with EA, check out our full research report (it’s free).

Dollar Tree (DLTR)

Trailing 12-Month Free Cash Flow Margin: 3.7%

A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ:DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.

Why Does DLTR Fall Short?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.1% for the last six years
2. Forecasted revenue decline of 21.7% for the upcoming 12 months implies demand will fall off a cliff
3. ROIC of 9.8% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

At $103.23 per share, Dollar Tree trades at 19.1x forward P/E. Check out our free in-depth research report to learn more about why DLTR doesn’t pass our bar.

Stocks We Like More

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