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 two cash-producing companies that leverage their financial strength to beat the competition and one that may face some trouble.
One Stock to Sell:
Commerce (CMRC)
Trailing 12-Month Free Cash Flow Margin: 4.8%
As a founding member of the MACH Alliance advocating for modern tech standards, Commerce (NASDAQ: CMRC) provides a SaaS platform that enables businesses to build and manage online stores, connect with marketplaces, and integrate with point-of-sale systems.
Why Should You Sell CMRC?
- Average billings growth of 2.3% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 3.1% for the next 12 months implies demand will slow from its two-year trend
- Poor free cash flow margin of 4.8% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Commerce’s stock price of $2.81 implies a valuation ratio of 0.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than CMRC.
Two Stocks to Watch:
Leidos (LDOS)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Formed through the split of IT services company SAIC, Leidos (NYSE: LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
Why Do We Like LDOS?
- Backlog has averaged 20.2% growth over the past two years, showing it has a pipeline of unfulfilled orders that will support revenue in the future
- Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Share buybacks catapulted its annual earnings per share growth to 28.2%, which outperformed its revenue gains over the last two years
Leidos is trading at $146.14 per share, or 11.9x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
Magnolia Oil & Gas (MGY)
Trailing 12-Month Free Cash Flow Margin: 31.2%
Operating over 600,000 net acres primarily in two distinct South Texas regions, Magnolia Oil & Gas (NYSE: MGY) drills and produces oil, natural gas, and natural gas liquids from South Texas formations.
Why Are We Positive On MGY?
- Annual revenue growth of 19.7% over the last five years was superb and indicates its market share increased during this cycle
- Highly-profitable operating model results in strong unit economics and a best-in-class gross margin of 84.8%
- Robust free cash flow margin of 40.1% gives it many options for capital deployment
At $30.31 per share, Magnolia Oil & Gas trades at 10.4x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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