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While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here is one cash-producing company that leverages its financial strength to beat its competitors and two that may struggle to keep up.
Two Stocks to Sell:
NXP Semiconductors (NXPI)
Trailing 12-Month Free Cash Flow Margin: 15.1%
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
Why Are We Hesitant About NXPI?
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Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.3% annually over the last two years
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Sales are projected to tank by 1.6% over the next 12 months as its demand continues evaporating
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Free cash flow margin dropped by 10.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
NXP Semiconductors is trading at $199 per share, or 16x forward P/E. Check out our free in-depth research report to learn more about why NXPI doesn’t pass our bar.
Align Technology (ALGN)
Trailing 12-Month Free Cash Flow Margin: 18.2%
Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ:ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.
Why Does ALGN Give Us Pause?
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Underwhelming clear aligner shipments over the past two years indicate demand is soft and that the company may need to revise its strategy
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Free cash flow margin shrank by 7.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
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Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $183.34 per share, Align Technology trades at 17.6x forward P/E. Read our free research report to see why you should think twice about including ALGN in your portfolio, it’s free.
One Stock to Watch:
McDonald's (MCD)
Trailing 12-Month Free Cash Flow Margin: 26.1%
With nicknames spanning Mickey D's in the U.S. to Makku in Japan, McDonald’s (NYSE:MCD) is a fast-food behemoth known for its convenience and broken ice cream machines.
Why Does MCD Stand Out?
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Same-store sales growth averaged 2.8% over the past two years, showing it’s bringing new and repeat diners into its restaurants
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Highly-profitable franchise model results in strong unit economics and a best-in-class gross margin of 56.9%
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MCD is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders