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1 Cash-Producing Stock to Keep an Eye On and 2 We Question

Barchart · 2d ago

MTSI Cover Image

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 is one cash-producing company that excels at turning cash into shareholder value and two best left off your watchlist.

Two Stocks to Sell:

VSE Corporation (VSEC)

Trailing 12-Month Free Cash Flow Margin: 2.4%

With roots dating back to 1959 and a strategic focus on extending the life of transportation assets, VSE Corporation (NASDAQ:VSEC) provides aftermarket parts distribution and maintenance, repair, and overhaul services for aircraft and vehicle fleets in commercial and government markets.

Why Do We Think Twice About VSEC?

  1. Gross margin of 17.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
  2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
  3. Underwhelming 5.1% return on capital reflects management’s difficulties in finding profitable growth opportunities

At $174.50 per share, VSE Corporation trades at 43.9x forward P/E. Check out our free in-depth research report to learn more about why VSEC doesn’t pass our bar.

AdaptHealth (AHCO)

Trailing 12-Month Free Cash Flow Margin: 6.5%

With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ:AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.

Why Are We Cautious About AHCO?

  1. Annual revenue growth of 2.1% over the last two years was below our standards for the healthcare sector
  2. Issuance of new shares over the last five years caused its earnings per share to fall by 1.3% annually while its revenue grew
  3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up

AdaptHealth is trading at $10.07 per share, or 12x forward P/E. Dive into our free research report to see why there are better opportunities than AHCO.

One Stock to Watch:

MACOM (MTSI)

Trailing 12-Month Free Cash Flow Margin: 19.2%

Founded in the 1950s as Microwave Associates, a communications supplier to the US Army Signal Corp, today MACOM Technology Solutions (NASDAQ: MTSI) is a provider of analog chips used in optical, wireless, and satellite networks.

Why Are We Positive On MTSI?

  1. Impressive 22.1% annual revenue growth over the last two years indicates it’s winning market share this cycle
  2. Offerings are difficult to replicate at scale and lead to a premier gross margin of 54.4%
  3. Earnings growth has massively outpaced its peers over the last five years as its EPS has compounded at 29.1% annually

MACOM’s stock price of $189.87 implies a valuation ratio of 44.2x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.

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