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. That said, here are two cash-producing companies that reinvest wisely to drive long-term success and one best left off your watchlist.
One Stock to Sell:
Werner (WERN)
Trailing 12-Month Free Cash Flow Margin: 1.6%
Conducting business in over a 100 countries, Werner (NASDAQ: WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.
Why Do We Pass on WERN?
- Sales tumbled by 5.7% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share fell by 37.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Werner is trading at $27.60 per share, or 34.8x forward P/E. If you’re considering WERN for your portfolio, see our FREE research report to learn more.
Two Stocks to Buy:
KLA Corporation (KLAC)
Trailing 12-Month Free Cash Flow Margin: 30.8%
Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ: KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.
Why Do We Love KLAC?
- Annual revenue growth of 15.9% over the past five years was outstanding, reflecting market share gains this cycle
- Offerings are difficult to replicate at scale and lead to a best-in-class gross margin of 60.5%
- Robust free cash flow margin of 30.9% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy
KLA Corporation’s stock price of $1,050 implies a valuation ratio of 31.7x forward P/E. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
Trane Technologies (TT)
Trailing 12-Month Free Cash Flow Margin: 13.5%
With low-pressure heating systems as its first product, Trane (NYSE: TT) designs, manufactures, and sells HVAC and refrigeration systems, the former to commercial and residential building customers and the latter to commercial truck manufacturers.
Why Are We Bullish on TT?
- Market share has increased this cycle as its 11.1% annual revenue growth over the last two years was exceptional
- Share repurchases over the last two years enabled its annual earnings per share growth of 22.7% to outpace its revenue gains
- ROIC punches in at 23.8%, illustrating management’s expertise in identifying profitable investments, and its returns are climbing as it finds even more attractive growth opportunities
At $402.49 per share, Trane Technologies trades at 29.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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