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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Choice Hotels (CHH)
Trailing 12-Month Free Cash Flow Margin: 11%
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Think Twice About CHH?
- Softer revenue per room over the past two years suggests it might have to invest in new amenities such as restaurants and bars to attract customers
- Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $124.01 per share, Choice Hotels trades at 17.2x forward price-to-earnings. Read our free research report to see why you should think twice about including CHH in your portfolio.
Live Nation (LYV)
Trailing 12-Month Free Cash Flow Margin: 5.8%
Owner of Ticketmaster and operator of music festival EDC, Live Nation (NYSE: LYV) is a company specializing in live event promotion, venue management, and ticketing services for concerts and shows.
Why Are We Hesitant About LYV?
- Demand for its offerings was relatively low as its number of events has underwhelmed
- Operating margin of 4.2% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- ROIC of 8.8% reflects management’s challenges in identifying attractive investment opportunities
Live Nation is trading at $131.99 per share, or 40.8x forward price-to-earnings. Check out our free in-depth research report to learn more about why LYV doesn’t pass our bar.
Landstar (LSTR)
Trailing 12-Month Free Cash Flow Margin: 5.3%
Covering billions of miles throughout North America, Landstar (NASDAQ: LSTR) is a transportation company specializing in freight and last-mile delivery services.
Why Is LSTR Risky?
- Annual sales declines of 19.4% for the past two years show its products and services struggled to connect with the market during this cycle
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Waning returns on capital imply its previous profit engines are losing steam
Landstar’s stock price of $140 implies a valuation ratio of 21.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than LSTR.
Stocks We Like More
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