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 avoid and some better opportunities instead.
TreeHouse Foods (THS)
Trailing 12-Month Free Cash Flow Margin: 2.8%
Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.
Why Is THS Risky?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 16.5%
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $19.40 per share, TreeHouse Foods trades at 10.2x forward P/E. Read our free research report to see why you should think twice about including THS in your portfolio.
Sherwin-Williams (SHW)
Trailing 12-Month Free Cash Flow Margin: 6%
Widely known for its success in the paint industry, Sherwin-Williams (NYSE: SHW) is a manufacturer of paints, coatings, and related products.
Why Should You Sell SHW?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.7%
- 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
Sherwin-Williams’s stock price of $331.75 implies a valuation ratio of 28x forward P/E. To fully understand why you should be careful with SHW, check out our full research report (it’s free for active Edge members).
Ziff Davis (ZD)
Trailing 12-Month Free Cash Flow Margin: 16.1%
Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ: ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.
Why Do We Steer Clear of ZD?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Earnings per share fell by 2% annually over the last five years while its revenue was flat, showing each sale was less profitable
- 15.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Ziff Davis is trading at $38.21 per share, or 5.3x forward P/E. Dive into our free research report to see why there are better opportunities than ZD.
Stocks We Like More
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