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 are three cash-producing companies to steer clear of and a few better alternatives.
Udemy (UDMY)
Trailing 12-Month Free Cash Flow Margin: 5.3%
With courses ranging from investing to cooking to computer programming, Udemy (NASDAQ: UDMY) is an online learning platform that connects learners with expert instructors who specialize in a wide range of topics.
Why Are We Hesitant About UDMY?
- Preference for prioritizing user growth over monetization has led to 1.3% annual drops in its average revenue per buyer
- Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
- Excessive marketing spend signals little organic demand and traction for its platform
Udemy’s stock price of $7.30 implies a valuation ratio of 11.4x forward EV/EBITDA. If you’re considering UDMY for your portfolio, see our FREE research report to learn more.
Keurig Dr Pepper (KDP)
Trailing 12-Month Free Cash Flow Margin: 10.2%
Born out of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple, Keurig Dr Pepper (NASDAQ: KDP) is a consumer staples powerhouse boasting a portfolio of beverages including sodas, coffees, and juices.
Why Does KDP Worry Us?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 5.9% for the last three years
- Efficiency has decreased over the last year as its operating margin fell by 6.1 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $27.34 per share, Keurig Dr Pepper trades at 13x forward P/E. To fully understand why you should be careful with KDP, check out our full research report (it’s free).
CME Group (CME)
Trailing 12-Month Free Cash Flow Margin: 63.7%
Born from the Chicago Mercantile Exchange founded in 1898 as a butter and egg trading venue, CME Group (NASDAQ: CME) operates the world's largest derivatives marketplace where traders can buy and sell futures and options contracts across interest rates, equities, currencies, commodities, and more.
Why Does CME Fall Short?
- Muted 4.7% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 8.2% annually
CME Group is trading at $262.50 per share, or 23.2x forward P/E. If you’re considering CME for your portfolio, see our FREE research report to learn more.
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