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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
PepsiCo (PEP)
Trailing 12-Month Free Cash Flow Margin: 8.1%
With a history that goes back more than a century, PepsiCo (NASDAQ: PEP) is a household name in food and beverages today and best known for its flagship soda.
Why Does PEP Give Us Pause?
- Declining unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Projected sales growth of 3.2% for the next 12 months suggests sluggish demand
- Efficiency has decreased over the last year as its operating margin fell by 2.1 percentage points
PepsiCo is trading at $140.14 per share, or 17.3x forward P/E. Read our free research report to see why you should think twice about including PEP in your portfolio.
H&R Block (HRB)
Trailing 12-Month Free Cash Flow Margin: 15.9%
Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE: HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.
Why Is HRB Not Exciting?
- Lackluster 4.1% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Projected sales growth of 3.3% for the next 12 months suggests sluggish demand
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $50.19 per share, H&R Block trades at 1.7x forward price-to-sales. To fully understand why you should be careful with HRB, check out our full research report (it’s free).
Expeditors (EXPD)
Trailing 12-Month Free Cash Flow Margin: 7.2%
Expeditors (NYSE: EXPD) offers air and ocean freight as well as brokerage services.
Why Do We Steer Clear of EXPD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.5% annually over the last two years
- Earnings per share have dipped by 4.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
Expeditors’s stock price of $125.44 implies a valuation ratio of 23.7x forward P/E. Dive into our free research report to see why there are better opportunities than EXPD.
Stocks We Like More
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