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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Caterpillar (CAT)
Trailing 12-Month Free Cash Flow Margin: 13.8%
With its iconic yellow machinery working on construction sites, Caterpillar (NYSE: CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.
Why Are We Hesitant About CAT?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.2%
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.7% annually
At $504.40 per share, Caterpillar trades at 27.5x forward P/E. If you’re considering CAT for your portfolio, see our FREE research report to learn more.
Ball (BALL)
Trailing 12-Month Free Cash Flow Margin: 3%
Started with a $200 loan in 1880, Ball (NYSE: BLL) manufactures aluminum packaging for beverages, personal care, and household products as well as aerospace systems and other technologies.
Why Are We Out on BALL?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- High input costs result in an inferior gross margin of 21.6% that must be offset through higher volumes
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.6% for the last five years
Ball’s stock price of $47.81 implies a valuation ratio of 12.4x forward P/E. To fully understand why you should be careful with BALL, check out our full research report (it’s free for active Edge members).
Pediatrix Medical Group (MD)
Trailing 12-Month Free Cash Flow Margin: 11.7%
With a network of approximately 2,620 affiliated physicians caring for some of the most vulnerable patients, Pediatrix Medical Group (NYSE: MD) provides specialized physician services focused on neonatal, maternal-fetal, pediatric cardiology and other pediatric subspecialty care across 37 states.
Why Should You Dump MD?
- Disappointing comparable store sales over the past two years show customers aren’t responding well to its offerings and value proposition
- Projected sales decline of 1.5% over the next 12 months indicates demand will continue deteriorating
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Pediatrix Medical Group is trading at $16.05 per share, or 9x forward P/E. Check out our free in-depth research report to learn more about why MD doesn’t pass our bar.
Stocks We Like More
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